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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ______________________
Commission file number 0-11877
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ELXSI CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 77-0151523
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(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
4209 Vineland Road, Suite J-1, Orlando, Florida 32811
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (407) 849-1090
--------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [ X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [ ]
The approximate aggregate market value of the voting stock held by
non-affiliates of the Registrant, based upon the closing price of the Common
Stock on March 14, 1997, as reported by NASDAQ, was $21,490,000. On March 14,
1997, the Registrant had outstanding 4,660,866 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be
held May 22, 1997 are incorporated by reference into Part III.
PART I
ITEM 1. BUSINESS
GENERAL
ELXSI Corporation (the "Company") is a Delaware corporation that was formed in
September 1980 as Trilogy Limited, a Bermuda corporation. The Company changed
its name to ELXSI Ltd. in January 1987, and changed its incorporation from
Bermuda to Delaware and became known as ELXSI Corporation in August 1987. A
public company since November 1983, the Company acquired ELXSI ("ELXSI"), a
California corporation, in October 1985. In December 1987, the Company's other
California subsidiary, Trilogy Systems Corporation was merged into ELXSI.
In September 1989 and January 1990, the Company entered into Stock and Note
Purchase Agreements (the "Stock Purchase Agreement") with and among, The Airlie
Group L.P. ("Airlie"), Continental Illinois Equity Corporation ("CIEC") and
Milley & Company ("M&C") (hereinafter referred to collectively as the "Buyers")
whereby the Buyers acquired 960,000 shares, par value $.001 per share ("Common
Stock"), $2,000,000 aggregate principal amount of the Company's notes and
warrants to purchase 1,204,000 shares (adjusted for a 1-for-25 reverse stock
split effected in May 1992) of the Company's common stock. Subsequent to these
transactions, the Company announced its intention of pursuing a program of
identifying, acquiring and managing middle-market companies. The Company is not
limiting its opportunities to any single industry.
On July 1, 1991, ELXSI acquired 30 restaurants operating under the Bickford's or
Bickford's Family Fare names and 12 Howard Johnson's restaurants operating under
the Howard Johnson's name, which were located in Massachusetts, Vermont, New
Hampshire, Rhode Island and Connecticut, from Marriott Family Restaurants, Inc.
("Marriott") for a purchase price of approximately $23,867,000 (including
transaction fees and costs).
Between 1991 and 1995, ELXSI sold six of its Howard Johnson's restaurants and
converted five of the remaining six Howard Johnson's into Bickford's Family
Restaurants. During the same period, ELXSI opened seven new Bickford's Family
Restaurants and acquired sixteen Abdow's Family Restaurants ("Abdow's"). ELXSI
subsequently converted two Abdow's into Bickford's Family Restaurants. During
1996, ELXSI converted an additional seven Abdow's into Bickford's Family
Restaurants, opened one additional Bickford's, sold one Abdow's and closed one
Abdow's. At December 31, 1996 ELXSI operated fifty-two Bickford's Family
Restaurants ("Bickford's"), five Abdow's and one Howard Johnson's Restaurant, in
its Bickford's Family Restaurant division (the "Bickford's Division" or
"Restaurant Division"). As used herein the term "Restaurants" refers to the
Bickford's, Abdow's and Howard Johnson's restaurants owned and operated in the
Restaurant Division.
On October 30, 1992, ELXSI acquired Cues, Inc., of Orlando, Florida and its two
wholly-owned subsidiaries, Knopafex, Ltd., of Toronto, Canada, and Cues B.V., of
Maastricht, The Netherlands. The Cues business in the United States is owned and
operated as a division of
2
ELXSI, and such division, Knopafex Ltd. and Cues B.V. are hereinafter
collectively referred to as "Cues" or the "Cues Division". Cues is principally
engaged in the manufacture and servicing of video inspection and rehabilitation
equipment for wastewater and drainage systems primarily for governmental
municipalities, service contractors and industrial users.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Reference is made to the information set forth in Note 12 (Segment Reporting) to
the Consolidated Financial Statements included herein, which information is
hereby incorporated by reference herein.
RESTAURANT DIVISION
The Restaurant Division sales were $61,283,000, $54,270,000 and $43,391,000 in
1996, 1995 and 1994, respectively. Restaurant Division sales represented 74.1%,
72.7% and 69.5% of the total sales of the Company during 1996, 1995 and 1994,
respectively.
The Restaurants are family-oriented and offer full service and relatively
inexpensive meals. Featuring a breakfast menu available throughout the day, the
Restaurants appeal to customers who are interested in a casual, low-to
moderately-priced meal. The Company has been successful in marketing the
breakfast menu concept to customers regardless of the time of day, and has
expanded lunch and dinner patronage by also offering improved traditional lunch
and dinner items. Most menu items are priced between $2.79 and $7.49, with the
average customer check being approximately $5.24, $5.12 and $4.96 in 1996, 1995
and 1994, respectively. Major categories of menu items are pancakes, waffles and
french toast, eggs and omelettes, "country" dinners, soups and side orders,
salads, hamburgers and sandwiches, and desserts. Breakfast items and coffee
accounted for approximately 70% of food sales in each of the past three fiscal
years.
Each Restaurant is open seven days a week, with most generally open from 7:00
a.m. to 11:00 p.m. during the week and later on weekends and with some open
twenty-four hours on the weekends. Some Restaurants are open twenty-four hours
every day. Approximately 60% of weekly sales volume has been generated Friday
through Sunday in each of the past three fiscal years.
While the Company believes that the Restaurants appeal to a wide variety of
customers, they primarily cater to senior citizens and families which are
attracted to the high-quality, low-to moderately-priced meals. Each Restaurant
generally draws its customers from within a five-mile radius and, consequently,
repeat business is extremely important to the Restaurant Division's success. The
Company believes that repeat business has accounted for a majority of the
Restaurant sales.
Each of the original 30 Bickford's consists of a free standing building that
covers approximately 2,700 to 7,000 square feet, and they are typically located
adjacent to major roads and highways and shopping malls. Nearly all contain two
dining areas, smoking and non-smoking. At
3
December 31, 1996, 12 of the Restaurant buildings were owned, while the
remaining 46 restaurants were either leased or owned buildings on leased land.
Each Restaurant has a kitchen equipped with grill space and ovens for service of
baked foods. Seating capacity ranges from 100 to 200 people. Five of the
Bickford's Restaurants provide counter service.
Restaurant Expansion and Renovation
The acquisition by ELXSI provided an opportunity to renovate the existing
Restaurants and to acquire additional locations. Capital expenditures during the
years ended December 31, 1996, 1995 and 1994 were as follows:
1996 1995 1994
----------- ----------- -----------
Expansion $ 483,000 $ 221,000 $ 485,000
Conversions 747,000 243,000 86,000
Purchase Leased Property -- -- 346,000
Renovation 384,000 415,000 95,000
Replacement due to fire loss 249,000 -- --
Refurbishment & Equipment 1,028,000 1,088,000 1,003,000
----------- ----------- -----------
$ 2,891,000 $ 1,967,000 $ 2,015,000
=========== =========== ===========
Acquisition of Abdow's $ -- $ 2,575,000 $ --
=========== =========== ===========
All of the above capital expenditures except for the 1995 acquisition of
Abdow's, were funded by earnings from operations. The acquisition of Abdow's in
1995, was funded by an increase in ELXSI's then existing line of credit with
Bank of America Illinois.
The Company currently plans to spend $1,950,000 for renovations, refurbishments
and equipment replacements and $800,000 for Restaurant expansion during 1997.
Management believes that earnings from operations will be sufficient to fund
this planned program in addition to other funding requirements.
The Company believes that increased profitability of the Restaurants will come
mainly from gaining market share by continuing its programs to improve food
products and service, and through its programs of refurbishing existing units,
opening new units, and to a lesser extent, from price increases. The Company
believes that it is partially due to the foregoing that sales at the original 30
Bickford's have increased.
Sales at 29 of the original Bickford's Restaurants, (excluding from 1996 the
Brockton, MA Restaurant, which was damaged by fire during 1996) increased 1.6%
in 1996, 1.3% in 1995 and 6.1% in 1994 (including a 53rd week), over the prior
year's sales; customer counts at these 29 Bickford's Restaurants were flat in
1996, increased 1.8% in 1995 and increased 1.5% in 1994 (including a 53rd week),
over the prior year's counts; sales at same Restaurants, including the five
converted and one remaining Howard Johnson's units, increased 0.7% in 1996, 0.4%
in 1995 and
4
5.8% in 1994 (including a 53rd week), over the prior year's sales, and customer
counts at same Restaurants decreased 0.8% in 1996, decreased 3.4% in 1995 and
increased 1.2% in 1994 (including a 53rd week), over the prior year's counts.
The foregoing comparisons are impacted by the fact that the Restaurant
Division's 1994 fiscal year comprised 53 weeks, as compared to 52 for each of
1995 and 1996. See the second paragraph of "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Results of Operations"
herein.
The Company takes an opportunistic approach to Restaurant Division expansion.
Management evaluates both purchase and lease opportunities, and, in most
instances, the Company favors opening new Restaurants utilizing leased
properties. The Company will generally open a new Restaurant only if it can
reasonably be expected to meet the Company's return on investment criteria,
which is generally an annual return on the investment of approximately 25% to
30%.
Restaurant Management and Supervision
Each Restaurant has a manager and one to three assistant managers, at least one
of whom must be on duty at all times during restaurant hours. The managers are
responsible for hiring all personnel at the Restaurant level, managing the
payroll and employee hours and ordering necessary food and supplies. The
Bickford's Division has nine district managers who, between them, cover all the
Restaurants. The district managers are responsible for the complete operation of
the Restaurants located in assigned geographical areas, including responsibility
for sales, profits and compliance with all operational policies and procedures.
The district managers, managers and assistant managers are all salaried
personnel, but are also compensated with performance incentives which can
provide a significant portion of their total compensation. Bonuses paid under
the program are based principally upon monthly sales volume, attainment of
certain cost targets and store profitability.
Sources and Availability of Materials
Food supplies are distributed by various Company-approved wholesalers and
purveyors, which deliver directly to each Restaurant based on the quoted cost of
individual food items. Essential supplies and raw materials are available from
several sources, and the Company is not dependent upon any one supplier for its
food supplies. These purchases from suppliers are generally done on a
verbal-purchase-order basis and without any long-term commitments or contracts.
The Company does not maintain or engage in any warehousing or commissary
operations.
Seasonality
The Restaurants experience slightly higher revenues in the summer months.
Customers
The Restaurants are not dependent upon a single customer or group of customers,
although a large portion of each Restaurant's customers live within a five mile
radius thereof and,
5
accordingly, repeat customers are important to the Bickford's Division's
success. See the fourth paragraph of "Restaurant Division" above.
Competition
The Restaurants are in direct competition with many local restaurants providing
family-oriented meals, some of which are owned, operated and/or franchised by
national and regional chains, many of whom are larger and have greater financial
resources than the Company. The restaurant business is highly competitive with
respect to price, service, location and food quality. The Company believes that
its attention to quality and service, along with its low-to moderately-priced
menu items, will continue to attract customers. In 1995, the Company noticed an
increase in the number of restaurants offering buffet-style dining in New
England. The Company believes that the freshness of its food and its reasonable
pricing compare favorably to these buffet concepts.
Employees
At December 31, 1996, the Restaurant Division employed approximately 2,650
persons, of whom approximately 2,200 were part-time hourly employees,
approximately 230 were full-time hourly employees and approximately 220 were
salaried personnel. This represents an increase since December 31, 1995 of
approximately 150 persons, consisting mainly of part-time employees. None of the
Restaurant Division's employees are represented by a union.
Environmental Matters
The Restaurant Division is subject to various federal, state and local laws,
rules and regulations relating to the protection of the environment that are
typical for companies in its industry. Management believes that compliance
therewith will have no material effect on its capital expenditures, earnings or
competitive position.
CUES DIVISION
The Cues Division sales were $21,460,000, $20,404,000 and $19,032,000 in 1996,
1995 and 1994, respectively. Cues Division sales represented 25.9%, 27.3% and
30.5% of the total sales of the Company during 1996, 1995 and 1994,
respectively.
Cues manufactures systems which utilize closed circuit television and highly
specialized rehabilitation equipment to inspect and repair underground sewer
lines. The infiltration of groundwater into sewer pipelines through leaking
joints and pipe fractures unnecessarily burdens the capacity of sewage treatment
plants by increasing the volume of fluids being treated. Leaking joints and pipe
fractures can also contribute to sewer line damage that can be repaired, in
severe cases, only by costly excavation. Cues installs its systems in specially
designed trucks and vans which are sold as mobile units. Cues also provides
product servicing and replacement parts for its customers and distributes
chemical grout sealants used in connection with its sealing equipment.
6
The principal customers of Cues are municipalities and contractors engaged in
sewer inspection and repair. Cues is not engaged in the service business of
maintaining and repairing sewer lines.
Inspection and Rehabilitation Equipment
Cues's inspection and sealing equipment constitutes an integrated system that
combines the capability of inspecting underground sewer lines with remote
control television cameras and creating a permanent maintenance record of the
condition of the sewer lines; pressure testing sewer line joints; and applying
chemical sealants to repair leaking joints and small pipe fractures. In
addition, Cues manufactures and sells a line of remotely operated robotic
cutting devices. These devices reinstate or open the laterals sewer lines, which
are smaller diameter pipes leading from residences or businesss into the main
sewer pipes, after the laterals have been blocked by the material used in
relining the main sewer pipe's interior surface.
Cues's inspection, cutting and sealing systems are placed in sewer lines through
manholes. The television camera, positioned using either a motorized transporter
or pulled on a skid assembly, relays a television picture of the interior of
that sewer line via cable to a monitoring station in a mobile unit above ground.
The television inspection system employs a three-inch-diameter color camera that
can be remotely adjusted for close-up viewing of problem areas. By recording the
position of the camera as it moves through the sewer lines, the Cues's
inspection and sealing equipment gives the customers a permanent record of the
condition of their sewer lines. If the television camera inspection of the sewer
lines discloses a leaking joint or pipe fracture, sealing equipment can be
introduced and positioned through use of the camera to make the repair. Once the
sealing module is positioned, inflatable packers seal off the line at either end
of the damaged area and a chemical sealant is applied that penetrates the leak
or fractures as well as the earth surrounding the pipe, hardening to seal the
line. The sealing module may also be used to determine the structural integrity
of the joint by applying air or water pressure against the walls of the joint.
This pressure test enables the customers to detect leaking joints that may not
be easily detected visually.
The sealing module manufactured by Cues is used to repair sewer lines where
infiltration or inflow of water occurs through leaking joints and pipe
fractures. Repairs can last 20 years or more, depending upon the structural
soundness of the sewer line or repaired joints. Cues's sealing equipment is not
designed to repair a severely damaged or collapsed pipe, which must be excavated
and replaced in the traditional manner or repaired by the use of other sewer
line repair technologies such as relining. However, Cues's Kangaroo cutting
system is often used to inspect and repair, through its cutting capabilities,
structurally deficient or collapsed sewer lines. Cues has also developed a line
of equipment for use in the inspection, but not the repair, of underground water
wells, dams, industrial pipe, potable water lines and large-pipe storm drains.
Cues also manufactures and sells a line of portable television inspection
equipment used primarily for inspection of lateral pipes ranging in size from 2
to 6 inches.
7
Product Servicing, Replacement Parts and Chemicals
Cues provides product servicing and repairs at its facilities in Orlando,
Florida; Toronto, Canada and Maastricht, The Netherlands. In Orlando, Cues also
maintains an inventory of replacement parts for distribution and sale to
customers. Cues generally warrants that all parts, components and equipment that
it manufactures will be free from defects in material and workmanship under
normal and intended use for a period of twelve months from the date of shipment
to the customer. Major items of equipment such as vehicles, generators, etc.,
furnished to, but not manufactured by, Cues, are covered under the warranty of
the third-party manufacturer of such equipment. Cues recorded warranty expense
of approximately $287,000, $255,000 and $196,000, during the years 1996, 1995
and 1994, respectively.
Product Development
Cues has an ongoing program to improve its existing products and to develop new
products. During the twelve months ended December 31, 1996, 1995 and 1994,
approximately $248,000, $311,000 and $287,000, respectively, was expended by
Cues for product development, (excluding, in each case, the compensation and
benefits expense of engineering department personnel, which comprises a
significant portion of research and development efforts). Although Cues holds
United States patents for components of its products, management believes the
expiration or invalidity of any or all of such patents will not have a material
adverse effect on its business. For 1997, Cues currently plans to spend
approximately $300,000 (exclusive of such personnel expenses) for product
development activities.
Source and Availability of Raw Materials
Cues manufactures certain components of its system and purchases others
including, television camera modules, monitors, video recorders, vehicles, which
are readily available from a number of sources. These purchases from suppliers
are done on a purchase order basis and without any long-term commitments or
contracts.
Cues has agreements with Orlando, Florida truck dealers to deliver truck bodies
that are used in the manufacture of Cues's mobile units. Under these agreements,
Cues reimburses the dealers' floor plan financing costs for those vehicles held
by the dealer until delivery. Cues does not have any other commitments or
contracts with its truck dealers. Management believes that alternative sources
for truck chassis are available and that the loss of any current dealer would
not have a material adverse effect on Cues.
Marketing
Cues markets its products and services in the United States though nine direct
salesmen. In certain geographic areas of the country, Cues markets it products
and services through independent representatives which are non-exclusive (to
Cues), none of whom accounted for more than 5% of the Cues Division's revenues
in any of the last three years. The Company believes that the loss of any of
these salesman or representatives would not have a material
8
adverse effect on the Cues Division. Cues also employees technical service
representatives located in Orlando, Toronto and Maastricht. Cues's major
customers include municipalities and contractors engaged in sewer line
inspection and repair as well as privately-owned sewer systems. No customer
accounted for more the 5% of Cues's 1996, 1995 or 1994 sales. Cues participates
in trade shows and uses trade magazine advertising in the marketing of its
products and services. The Cues name is well-established, affording it and its
products wide recognition within its industry.
Outside North America, Cues markets its products in five continents, either
directly or through non-exclusive (to Cues) independent distributors, agents or
dealers, none of whom accounted for more than 5% of the Cues Division's revenue
in any of the last three years. During 1996, 1995 and 1994, export sales to
foreign countries represented approximately 16%, 14% and 16% of total Cues
sales, respectively. The vast majority of equipment sales to customers in
foreign countries are arranged under U.S. dollar-denominated letters of credit
agreements and therefore the currency and payment risk are minimized.
The Cues Division historically has not experienced any material problems or
risks in distributing and selling products outside the United States, other than
those normally associated with such efforts (e.g., language barriers, time
differences, customs regulations and complications relative to the conforming of
equipment to local electronic, video, vehicle and other standards).
Competition
Competition for the type of products sold by Cues is based mostly on price, and
also service and reliability. Management believes that it competes effectively
in each of these respects. Management also believes that there are six companies
which produce and sell products which are competitive with those produced by
Cues. A significant portion of sales are generated through a bidding process
initiated by municipalities. This process is extremely price sensitive,
requiring Cues to meet or beat competitors' bids in order to secure sales.
Employees
At December 31, 1996 Cues had 128 full and part-time employees. This includes
five employees of Knopafex, Ltd. and four employees of Cues B.V. None of the
Cues Division employees are represented by a union.
Environmental
The Cues Division is subject to various federal, state and local laws, rules and
regulations relating to the protection of the environment that are typical for
companies in its industry. Management believes that compliance therewith has had
no material effect on its capital expenditures, earnings or competitive
position.
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ITEM 2. PROPERTIES
ELXSI leases land and/or buildings at 46 of its 58 restaurants, under lease
agreements expiring (including extension options) on various dates through 2032.
The majority of these leases require ELXSI to pay taxes, maintenance, insurance
and other occupancy expenses related to the leased premises. The rental payments
for a majority of the Restaurant locations are based upon minimum annual rental
payments and a percentage of their respective sales.
Below is a summary of the Restaurant properties as of December 31, 1996.
Howard
Bickford's Johnson's Abdow's Total
---------- --------- ------- -----
Massachusetts: Owned 8 -- -- 8
Leased 25 1 3 29
Connecticut: Owned 2 -- -- 2
Leased 5 -- 2 7
Rhode Island: Owned -- -- -- --
Leased 5 -- -- 5
New Hampshire: Owned 2 -- -- 2
Leased 5 -- -- 5
Total: Owned 12 -- -- 12
Leased 40 1 5 46
ELXSI also owns a 4,000 square foot building in Boston, Massachusetts, which is
used for its Restaurant Division management and administrative headquarters, and
a 26,000 square foot office and manufacturing facility in Orlando, Florida for
its Cues Division. In addition, Cues B.V. owns an office and manufacturing
facility in Maastricht, The Netherlands, and Knopafex, Ltd. rents office and
manufacturing space in Toronto, Canada.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings (other than ordinary routine
litigation incidental to the business) to which the Company or its Subsidiary or
of which any of their respective properties is the subject, nor are there any
proceedings known to be contemplated by governmental authorities against the
Company or its Subsidiary.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to vote of shareholders during the fourth
quarter of 1996.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market Information
The Company's Common Stock is traded in the over-the-counter market and quoted
in the automated quotation system of the National Association of Securities
Dealers, Inc.- National Market System ("NASDAQ"), under the symbol ELXS. The
following table sets forth high and low closing sales prices for the fiscal
quarters indicated, as reported by NASDAQ.
1996 1995
----------------- -----------------
High Low High Low
---- --- ---- ---
First Quarter $6.88 $5.50 $7.38 $5.00
Second Quarter 7.63 5.25 7.13 5.63
Third Quarter 6.63 4.88 7.81 5.88
Fourth Quarter 6.63 4.88 6.50 4.88
On March 14, 1997, the reported last sale price for the Company's Common Stock
in NASDAQ was $6.50 per share. The above quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
Holders
As of March 14, 1997 there were 5,882 holders of record of the Company's Common
Stock.
Dividend History
The Company has never paid any dividends, nor is there current intention to pay
any dividends in 1997, however management will consider paying dividends in the
future.
Stock Transfer Agent
The Company's stock transfer agent is Continental Stock Transfer and Trust Co.,
2 Broadway, New York, New York 10004, (212) 509-4000.
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ITEM 6. SELECTED FINANCIAL DATA
(Amounts in Thousands, Except Per Share Data)
Year Ended December 31,
----------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- -----------
Net Sales $ 82,743 $ 74,674 $ 62,423 $ 55,682 $ 38,139
Costs and Expenses:
Cost of sales (66,603) (58,347) (47,440) (41,338) (29,168)
General and administrative (7,362) (7,484) (6,630) (6,406) (2,761)
Depreciation and amortization (2,775) (2,206) (1,794) (1,589) (1,138)
Interest income 111 125 8 -- --
Interest expense (1,495) (1,767) (1,426) (1,653) (1,496)
Other income (expense) 432 65 (41) (80) 222
Benefit (provision) for income taxes 2,332 (514) (366) (348) (260)
---------- ---------- ---------- ---------- ----------
Net income $ 7,383 $ 4,546 $ 4,734 $ 4,268 $ 3,538
========== ========== ========== ========== ==========
Net income per common share
Primary $ 1.51 $ 0.89 $ 0.79 $ 0.72 $ 0.68
========== ========== ========== ========== ==========
Fully diluted $ 1.51 $ 0.89 $ 0.79 $ 0.69 $ 0.68
========== ========== ========== ========== ==========
Weighted average number of common
and common equivalent shares
Primary 4,902 5,093 6,014 5,947 5,212
========== ========== ========== ========== ==========
Fully diluted 4,902 5,093 6,014 6,234 5,211
========== ========== ========== ========== ==========
Other Data:
Working capital $ 8,649 $ 2,438 $ (423) $ 471 $ (1,391)
Total assets 59,478 47,699 40,516 38,520 35,202
Capitalized leases and long term debt 20,704 14,924 12,304 12,016 13,541
Stockholders' equity 28,913 22,714 19,398 18,126 13,885
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
See Note 1 to the Consolidated Financial Statements for background on the
Company. The Company's focus continues to be identifying, acquiring, managing
and operating selected middle market companies.
Both the Company's corporate functions and Cues Division have fiscal years
consisting of four calendar quarters ending on December 31. The Restaurant
Division's fiscal years consist of four 13-week quarters (and, accordingly, one
52-week period) ending on the last Saturday in December; this requires that
every six or seven years the Restaurant Division add an extra week at the end of
the fourth quarter and fiscal year. This was the case in the fourth quarter of
1994.
YEAR ENDED DECEMBER 31, 1996
The Company's 1996 revenues and expenses resulted from the operation of ELXSI's
Restaurant and Cues Divisions and the Company's corporate expenses
("Corporate").
Restaurant Division. The Restaurants had sales of $61,283,000, cost of sales of
$50,990,000, selling, general and administrative expenses of $1,956,000 and
depreciation and amortization expense of $2,318,000, which yielded operating
income of $6,019,000. In addition, the Restaurants had $246,000 of interest
expense related to the amortization of deferred financing fees and capital
leases, and other income of $227,000 related mainly to a gain on the replacement
of assets lost in a Restaurant fire, resulting in income before taxes of
$6,000,000.
Cues Division. Cues had sales of $21,460,000, cost of sales of $15,613,000,
selling, general and administrative expenses of $4,056,000 and depreciation and
amortization expense of $457,000, which yielded operating income of $1,334,000.
In addition, Cues had $42,000 of interest expense, $5,000 of other income and
$45,000 of tax expense, resulting in income before taxes of $1,252,000.
Corporate. Corporate general and administrative expenses were $1,350,000. The
major components of these expenses were the compensation accrual related to the
Bickford's Phantom Stock Option Plan (see the Company's proxy statement for
further information), management fees paid to Cadmus Corporation ("Cadmus")
under a management agreement (see NOTE 6 to the Consolidated Financial
Statements of the Company), legal expenses, Corporate and Bickford's audit
expenses, and stockholder services and financial reporting expenses.
The terms of the Cadmus management agreement provide for Cadmus to provide the
Company with advice and services with respect to the Company's business and
financial management and long-range planning. Specific examples of services
historically rendered to the Company under
13
this management agreement include: (a) ongoing hands-on evaluation of Company
and division management; (b) direct management of a portfolio of restaurants;
(c) preparing and reviewing division operating budgets and plans; (d) evaluating
new restaurant locations and menu changes; (e) identifying, and assisting in the
divestiture of, under-performing assets; (f) evaluating financing options and
negotiating with lenders; (g) assisting in the compliance with securities laws
and other public reporting requirements; (h) communicating with stockholders;
(i) negotiating and arranging insurance programs; (j) monitoring tax compliance;
(k) evaluating and approving capital spending; (l) cash management services; (m)
preparing market research; (n) developing and improving management reporting
systems; and (o) identifying and evaluating acquisition candidates and
investment opportunities. It is through the Cadmus management agreement that the
Company is provided the non-director services of: Mr. Milley (except in his
capacity as President of Cues, for which he is directly compensated by ELXSI),
the Company's Chairman of the Board, President and Chief Executive Officer;
Thomas R., Druggish, the Company's Vice President, Treasurer and Secretary; and
Kevin P. Lynch, a Vice President and Director of the Company.
Corporate interest expense was $1,207,000, consisting of senior bank debt
interest of $1,045,000 and senior subordinated note interest of $162,000. The
Company's senior bank debt lender is Bank of America Illinois; NOTE 7 to
Consolidated Financial Statements of the Company includes information regarding
the terms of the bank debt.
During 1996, the Company recorded a current consolidated tax provision of
$504,000 and a deferred tax benefit of $2,881,000, resulting in a net income tax
benefit of $2,332,000 at the corporate level. The deferred tax benefit was
recorded in accordance with Statement of Accounting Standards Number 109
"Accounting For Income Taxes" ("SFAS 109"). SFAS 109 requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between the carrying amounts and the tax basis of other
assets and liabilities. Management evaluated the likelihood of future earnings
during the remaining life of the net operating loss carryforwards and the
anticipated realization of the tax loss carryforwards in determining the amount
of the deferred tax asset to record. The utilization of the Company's net
operating loss and tax credit carryforwards may be impaired or reduced under
certain circumstances. Events which may affect these carryforwards include, but
are not limited to, cumulative stock ownership changes of 50% or more over a
three-year period, as defined, and the timing of the utilization of the tax
benefit carryforwards. Such changes in ownership would significantly restrict
the Company's ability to utilize loss and credit carryforwards in accordance
with sections 382 and 383 of the Internal Revenue Code ("IRC"). Management
recognizes that it is limited in its ability to prevent such cumulative changes
in ownership from occurring. If a change of ownership were to occur, factors
such as the number of common shares issued and outstanding, the market price of
such shares, short term treasury rates, etc., are used under the current tax
laws to determine the amount of the tax loss carryforward that can be utilized
each year. In the event that a change in ownership does not take place, the
Company may be able to recognize the benefit of additional loss carryforwards.
At December 31, 1995, the Company maintained a 100% valuation allowance to
account for the potential limitations imposed by IRC 382 and 383, as well as to
give effect to uncertainties
14
surrounding the future success of restaurant acquisitions and manufacturing
consolidations undertaken during the year.
During 1996, a portion of the valuation allowance was released based upon the
success of restaurant conversions and manufacturing consolidations which had
begun in 1995. Accordingly, the Company recognized a $2,881,000 net deferred tax
asset. The net deferred tax asset represents the amount of net operating loss
and credit carryforwards which management believes are more likely than not to
be realized in the future. At the end of 1996 and 1995, the Company believed
that it would have a change of ownership of 50% or more.
Recording the deferred tax benefit in 1996 resulted in an increase in net income
and earnings per share of $2,881,000 and $.59, respectively. It is uncertain,
due to the unpredictable nature of the factors involved in determining the
deferred tax asset, what impact SFAS 109 will have on future results.
Earnings Per Share. Earnings per share and the weighted average number of shares
outstanding were $1.51 and 4,902,000, respectively. This compares to $0.89 per
share for 1995, when there were 5,093,000 shares outstanding (on a weighted
average basis). The average stock price during 1996 and 1995 was $5.83 and
$6.12, respectively. The market price at December 31, 1996 and 1995 was $6.63
and $6.125, respectively.
YEAR ENDED DECEMBER 31, 1995
The Company's 1995 revenues and expenses resulted from the operation of ELXSI's
Restaurant and Cues Divisions and the Company's corporate expenses
("Corporate").
Restaurant Division. The Restaurants had sales of $54,270,000, cost of sales of
$43,729,000, selling, general and administrative expenses of $1,620,000 and
depreciation and amortization expense of $1,833,000, which yielded operating
income of $7,088,000. In addition, the Restaurants had $297,000 of interest
expense related to the amortization of deferred financing fees and capital
leases, resulting in income before taxes of $6,791,000.
Cues Division. Cues had sales of $20,404,000, cost of sales of $14,618,000,
selling, general and administrative expenses of $4,425,000 and depreciation and
amortization expense of $373,000, which yielded operating income of $988,000. In
addition, Cues had $22,000 of interest expense, $2,000 of interest income,
$68,000 of other income and $4,000 of tax expense adjustments, resulting in
income before taxes of $1,032,000.
Corporate. Corporate general and administrative expenses were $1,439,000. The
major components of general and administrative expenses include the compensation
accrual related to the Bickford's Phantom Stock Option Plan, the management fees
paid to Cadmus, legal expenses, corporate and Bickford's audit expenses, and
stockholder services and financial reporting expenses. Interest expense was
$1,448,000, consisting of senior bank debt interest of $1,275,000 and senior
subordinated note interest of $173,000. In addition, the Company recorded
interest
15
income of $123,000, other expense of $3,000 and a consolidated tax provision of
$510,000 at the corporate level.
Earnings Per Share. Earnings per share and the weighted average number of shares
outstanding for the year ended December 31, 1995 were $0.89 and 5,093,000,
respectively. The average stock price during 1995 was $6.12 and the market price
at December 31, 1995 was $6.125.
YEAR ENDED DECEMBER 31, 1994
The Company's 1994 revenues and expenses resulted from the operation of ELXSI's
Restaurant and Cues Divisions and the Company's corporate expenses
("Corporate").
Restaurant Division. The Restaurants had sales of $43,391,000, cost of sales of
$34,234,000, selling, general and administrative expenses of $1,293,000 and
depreciation and amortization expense of $1,460,000, which yielded operating
income of $6,404,000. In addition, the Restaurants had $266,000 of interest
expense related to the amortization of deferred financing fees and capital
leases, resulting in income before taxes of $6,138,000.
The fifty-third week included in the 1994 results added approximately $810,000
in sales and, management estimates, approximately $200,000 in operating income.
Cues Division. Cues had sales of $19,032,000, cost of sales of $13,206,000,
selling, general and administrative expenses of $4,146,000 and depreciation and
amortization expense of $334,000, which yielded operating income of $1,346,000.
In addition, Cues had $32,000 of interest expense, $27,000 of other expense and
$5,000 of tax adjustments resulting in income before taxes of $1,282,000.
Corporate. Corporate general and administrative expenses were $1,191,000 in
1994. The major components of general and administrative expenses were the
management fees paid to Cadmus, the compensation accrual related to the
Bickford's Phantom Stock Option Plan, legal expenses, corporate and Bickford's
audit expenses, and stockholder services and financial reporting expenses.
Interest expense was $1,128,000, consisting of senior bank debt interest of
$418,000 and subordinated note interest of $710,000. In addition, the Company
recorded interest income of $8,000, other expense of $14,000 and a consolidated
tax provision of $361,000 at the corporate level.
Earnings Per Share. Earnings per share and the weighted average number of shares
outstanding for the year ended December 31, 1994 were $0.79 and 6,014,000,
respectively. The average stock price during 1994 was $5.42 and the market price
at December 31, 1994 was $5.25.
16
COMPARISON OF 1996 RESULTS TO 1995 RESULTS
The 1996 sales increased by $8,069,000, or 10.8%, gross profit decreased by
$187,000, or 1.1%, selling, general and administrative expense decreased by
$122,000, or 1.6%, and depreciation and amortization increased by $569,000, or
25.8%, resulting in an operating income decrease of $634,000, or 9.6%, in each
case as compared to 1995. Interest expense decreased by $272,000, or 15.4%,
interest income decreased by $14,000, other income increased by $367,000. In
1996, the Company recorded an income tax benefit of $2,332,000 compared to an
income tax expense of $514,000 in 1995. The above changes resulted in a increase
in net income of $2,837,000, or 62.4%.
Restaurant Division. Restaurant sales increased by $7,013,000, or 12.9%, in
1996. The sales increase is attributable to an increase in the same store sales
of $309,000 and an increase in sales at new restaurants of $7,807,000, which
were partially offset by a decrease in sales of $1,103,000 at a fire-damaged
Bickford's and the sale of one and closing of another Abdow's. The 1996 sales
increase due to new restaurants consisted of $3,372,000 from the five purchased
Abdow's, $3,563,000 from the nine converted Abdow's and $872,000 from other new
Bickford's. Same store restaurant sales increased by $309,000, or 0.7%, mainly
as a result of a $483,000, or 1.6%, sales increase in the original Bickford's
acquired in 1991 (29 locations; excluding the fire damaged site). This increase
was partially offset by a sales decreases of $107,000, or 0.9%, and $67,000, or
4.5%, at the eleven other comparable Bickford's and the one remaining Howard
Johnson's unit, respectively.
The original 29 Bickford's (excluding the fire damaged site) had flat customer
counts while the 11 other comparable Bickford's and the one Howard Johnson's had
decreases in customer counts of 2.6% and 3.0%, respectively. Overall comparable
customer counts decreased by 0.8% in 1996 compared to 1995 primarily due to the
severe winter weather in the first quarter of 1996. The one Howard Johnson's
Restaurant is located near one of the three Bickford's that are licensed to an
unrelated third party, and under the applicable license agreement, may not be
converted into a Bickford's. Management is continuing to focus on improving
sales at all Restaurants through attention to customer service, food quality,
new menu items and Restaurant refurbishments.
Restaurant gross profit decreased by $248,000 and the gross profit as a
percentage of sales decreased from 19.4% in 1995 to 16.8% in 1996. The main
factor in the 2.6% decline in the gross profit percentage was an increase in
labor costs. Labor costs as a percentage of sales increased by 2.0%, from 34.4%
in 1995 to 36.4% in 1996, due to higher labor costs as a percentage of sales at
the nine converted and five remaining Abdow's and the $355,000 of start-up
training costs in 1996 related primarily to the conversion of the nine Abdow's
into Bickford's restaurants. The 14 Abdow's Restaurants (including the nine
converted into Bickford's) had labor costs as a percentage of sales of 40.8%.
Management does not intend to reduce the labor costs immediately at the
converted Abdow's as it does not wish to compromise their excellent service
reputation. Food costs decreased by 0.3% in 1996 as compared to 1995, while
variable costs increased by 0.4% during the same period. The food costs decrease
was mainly due to an increase in cash rebates related to the increased volume of
food purchases associated with the addition of new Restaurants, including the
Abdow's. Upon conversion of an Abdow's into a
17
Bickford's Restaurant, food cost as a percentage of sales tend to decline to the
average Bickford's level. The Bickford's food costs increased as a percentage of
sales as a result of the sale of higher-cost dinner items and an increase in the
cost of individual food items, including eggs, bacon and sausage, partially
offset by a decline in coffee costs. In addition, fixed costs as a percentage of
sales increased by 0.6% in 1996, due to higher rents related to the inclusion of
the Abdow's Restaurants for twelve months in 1996 as compared to six months in
1995. Management currently intends to keep the present five Abdow's Restaurants
operating under that concept, which has generally lower margins than Bickford's,
and therefore the overall margins will continue to be negatively affected.
Restaurant selling, general and administrative expense increased by $336,000
during 1996 over 1995 mainly as a result of adding additional support personnel
as a result of the acquisition of Abdow's.
Restaurant depreciation and amortization increased by $485,000 during 1996 as
compared to 1995. Restaurant depreciation and amortization will continue to
increase each year with the addition of new Restaurants, or until such time as
assets valued and recorded at the date of the Bickford's acquisition in July
1991 become fully depreciated. The equipment acquired in that acquisition has a
seven-year useful life, and will become fully depreciated in 1998.
As a result of the above, Restaurant Division operating income decreased by
$1,069,000 in 1996 compared to 1995.
Cues Division. Cues's sales increased by $1,056,000, or 5.2%, in 1996 compared
to 1995. As a result of this increase and a 1.1% decrease in Cues's gross profit
percentage in 1996 compared to 1995, gross profit increased by $61,000.
Operating income was positively impacted by a decrease in selling, general and
administrative expenses of $369,000 partially offset by a increase in
depreciation and amortization expense of $84,000. The decrease in selling,
general and administrative expenses resulted primarily from the consolidation of
Canadian operations into Orlando and the restructuring of the Cues west coast
sales effort to become more efficient. As a result of the above, operating
income increased by $346,000 in 1996 as compared to 1995. Management anticipates
that gross margins will continue to experience pressure in 1997 due to the fact
that Cues's customers continue to stress pricing factors in awarding contracts
through the competitive bidding process.
Corporate. Corporate's general and administrative expenses decreased by $89,000
during 1996 compared to 1995, partially due to a decrease in the Bickford's
management compensation accrual related to its Phantom Stock Option Plan.
Interest expense decreased by $241,000 in 1996 compared to 1995 due to a
decrease in interest rates and a lower average debt balance in 1996. The bank
interest rate applicable to Company borrowings at December 31, 1996 was either
prime (8.25%) or 2% over the London Eurodollar rate, then approximately 7.68%.
The Company has the option of designating a portion of the bank line of credit
as London Eurodollar rate financing for 30, 60 or 90-day periods. The bank
interest rate available to the Company at December 31, 1995 was 1% above prime,
or 9.5%. In addition, the Company prepaid the remaining $1,199,000 of its senior
subordinated notes during 1996. These notes had interest rates of 15% and 14.5%.
18
On December 30, 1996, ELXSI purchased three revolving notes with a face value of
$6,650,000 from Bank of America Illinois, its lending bank, for $5,850,000. The
Company recorded this $800,000 discount as a reduction in the face amount of the
notes on the balance sheet. The face value of the notes, payable by three wholly
owned subsidiaries of Azimuth Corporation; (collectively, the "Azimuth
Subsidiaries"), bear interest at 15% per annum payable in arrears on the 1st and
16th of each month and mature on June 30, 1998. The notes are fully
collateralized by all of the assets of Azimuth Corporation and the Azimuth
Subsidiaries, including accounts receivable and inventory. Two of the Azimuth
Subsidiaries design and manufacture trade show booth displays; the other is a
distributor of electrical fuses and fasteners. Certain of the officers and
directors and stockholders of Azimuth Corporation are officers and directors of
the Company and/or ELXSI. In addition, ELXSI recorded a $225,000 closing fee
receivable due from the Azimuth Subsidiaries under the Recapitalization
Agreement, and accrued certain legal and bank fees payable. ELXSI recorded the
net fees in accounts receivable within the accompanying consolidated financial
statements. ELXSI will amortize this discount and the net closing fees over the
life of the Azimuth Subsidiary Notes utilizing the effective interest method of
amortization.
The purpose of the transactions described above and in this paragraph was to
prudently utilize the Company's debt capacity to earn a return not generally
available in the marketplace for the commensurate risk. The knowledge of the
Azimuth Corporation credit and the short time frame required to respond to Bank
of America Illinois made ELXSI unique in its ability to capture such an
attractive opportunity. Under the relevant agreements, the Azimuth Subsidiaries
have the right to prepay in full their revolving notes held by ELXSI at a price
(or for a payment) equal to (i) the combined principal amount outstanding on the
date of prepayment (which may be as much as $9,965,000) plus (ii) all accrued
but unpaid interest thereon less (iii) if purchased in April, May or June 1997 a
discount of $275,000, $175,000 and $75,000, respectively. Therefore, if the
Azimuth Subsidiary notes are not satisfied before July 1, 1997, ELXSI will have
fully earned the $800,000 discount applied to the purchase. As a result of the
transactions, described in this paragraph, ELXSI became the senior revolving
credit lender to the Azimuth Subsidiaries. Funding for ELXSI's purchase of the
Azimuth Subsidiary notes, as well, as for any further revolving credit loans
that may be made by ELXSI to the Azimuth Subsidiaries, was provided by Bank of
America Illinois under an amendment and restatement of its existing credit
agreement with ELXSI. The Company's return on investment from the foregoing
transactions is in the form of net interest (i.e., the difference between the
Azimuth's Subsidiaries' 15% interest rate and the Company's cost of borrowing),
the discount earned by the Company and the closing fee described above.
COMPARISON OF 1995 RESULTS TO 1994 RESULTS
The 1995 sales increased $12,251,000, or 19.6%, gross profit increased
$1,344,000, or 9.0%, selling, general and administrative expense increased
$854,000, or 12.9%, and depreciation and amortization increased $412,000, or
23.0%, resulting in an operating income increase of $78,000, or 1.2%, in each
case as compared to 1994. Interest expense increased by $341,000, or 23.9%,
interest income increased by $117,000, other income and expense increased from
expense of
19
$41,000 in 1994 to income of $65,000 in 1995, and income taxes increased by
$148,000, or 40.4%, resulting in a decrease in net income of $188,000, or 4.0%.
Restaurant Division. Restaurant sales increased by $10,879,000, or 25.1%, in
1995. The sales increase was attributable to a decrease in the same store sales
of $152,000, offset by the addition of new restaurants that added $11,031,000 to
1995 sales. The 1995 sales increase due to new restaurants consisted of
$8,112,000 from 14 purchased Abdow's, $873,000 from the two Abdow's converted in
1995 and $2,046,000 from other new Bickford's. Same store restaurant sales
decreased by $152,000, or 0.4%, mainly due to the inclusion of a 53rd week in
1994, which added $763,000 to those restaurants 1994 sales. The original 30
Bickford's acquired in 1991 had a sales increase of $405,000, or 1.3%, the nine
other comparable Bickford's (including the five converted Howard Johnson's) had
a sales decrease of $494,000, or 5.1%, while the one remaining Howard Johnson's
unit had a sales decline of $63,000, or 4.1%. Included in the above comparisons
is the effect of the fifty-third week in 1994, which added sales of $582,000,
$155,000 and $26,000 to the original thirty Bickford's, the nine other
comparable Bickford's and the one remaining Howard Johnson Restaurant,
respectively. Excluding the 53rd week from 1994 sales, the same store Restaurant
sales increased by $611,000, or 1.5%.
The original thirty Bickford's, the nine other comparable Bickford's and the one
Howard Johnson's Restaurant had a decrease in customer counts of 1.8%, 7.6% and
9.8%, respectively. Excluding the 53rd week from 1994, the original thirty
Bickford's, the nine other comparable Bickford's and the one Howard Johnson's
Restaurant had an increase (decrease) in customer counts of 0.1%, (6.2)% and
(8.3)%, respectively, during 1995.
Restaurant gross profit increased by $1,384,000 but declined as a percentage of
sales from 21.1% in 1994 to 19.4% in 1995. The main factor in the 1.7% decline
in the gross profit percentage was a 1.5% increase in food costs as a percentage
of sales, primarily attributable to the Abdow's units. The Bickford's food costs
increased as a percentage of sales, as a result of the sale of higher-cost
dinner items, and an increase in the cost of individual food items, including
eggs, bacon and sausage, partially offset by a decline in coffee costs. In
addition to the food cost increase, variable costs as a percentage of sales
increased by 0.4% in 1995. Labor costs as a percentage of sales declined by
0.2%, from 34.6% to 34.4%, despite higher labor costs as a percentage of sales
at the 16 Abdow's. The 16 Abdow's (including the two converted into Bickford's)
had labor costs as a percentage of sales of 37.2% in 1994.
Restaurant selling, general and administrative expenses increased by $327,000
during 1995 over 1994 mainly as a result of adding additional support personnel
as a result of the acquisition of Abdow's.
Restaurant depreciation and amortization increased by $373,000 during 1995 as
compared to 1994.
As a result of the above, Restaurant Division operating income increased by
$684,000 in 1995 compared to the 53 weeks ended December 31, 1994. Management
estimates that the inclusion of a 53rd week in 1994 added approximately $200,000
to operating income that year.
20
Cues Division. Cues's sales increased by $1,372,000, or 7.2%, in 1995 as
compared to 1994. As a percentage of sales, Cues's gross profit declined by 2.3%
in 1995 compared to 1994, causing gross profit to decrease by $40,000. Operating
income was negatively impacted by an increase in selling, general and
administrative expense of $279,000 and an increase in depreciation and
amortization expense of $39,000. As a result of the above, operating income
decreased by $358,000 in 1995, as compared to 1994.
Corporate. Corporate general and administrative expenses increased by $248,000
during 1995 as compared to 1994 mainly due to an increase in the Bickford's
management compensation accrual related to its Phantom Stock Option Plan.
Interest expense increased by $320,000 in 1995 as compared to 1994, due to a
higher average debt balance in 1995, partially offset by a decrease in interest
rates in 1995. The higher average debt balance in 1995 was the result of
spending approximately $3.8 million to purchase Abdow's Restaurants and $7.4
million to repurchase Company common stock, warrants to purchase common stock
and senior subordinated notes at the end of 1994 and beginning of 1995. The bank
interest rate applicable to Company borrowing was 1% above the prime lending
rate (9.5%, at December 31, 1995), and 1.5% above the prime lending rate,
(10.0%, at December 31, 1994).
ACQUISITIONS
On July 3, 1995, ELXSI acquired 16 Abdow's Family Restaurants from Abdow
Corporation of Springfield, MA, for a price of approximately $3,800,000
(including transaction fees and expenses of approximately $300,000). The
transaction included the leasing of the 16 restaurant sites and the purchase of
associated assets located in western Massachusetts and central Connecticut. The
acquisition was financed by an increase in ELXSI's existing line of credit with
Bank of America Illinois. On February 1, 1996, ELXSI completed its sale of the
Vernon, Connecticut Abdow's Restaurant for net proceeds of $1,225,000. During
1996, ELXSI closed one under-performing Abdow's Restaurant.
INCOME TAXES AND INFLATION
In 1996, the Company recorded a provision for current federal alternative
minimum taxes of $105,000 (after the benefit of federal net operating loss
carryforwards of $1,616,000), a state income tax provision of $444,000 and a
deferred tax benefit of $2,881,000, resulting in an income tax benefit of
$2,332,000 (see "Year Ended December 31, 1996 - Corporate" above).
In 1995, the Company recorded a provision for federal alternative minimum taxes
of $118,000 (after the benefit of federal net operating loss carryforwards of
$1,619,000), and a state income tax provision of $396,000.
In 1994, the Company recorded a provision for federal alternative minimum taxes
of $88,000 (after the benefit of federal net operating loss carryforwards of
$1,526,000), and a state income
21
tax provision of $278,000 (after the benefit of state net operating loss
carryforwards). Approximately one-half of ELXSI's consolidated taxable income is
apportioned to Massachusetts. The final year that the net operating loss was
available to ELXSI to offset Massachusetts taxable income was 1994 because the
five year Massachusetts carryforward period expired in 1995. During 1994, ELXSI
would have recorded a provision for additional state income taxes of $190,000
had the Massachusetts net operating loss carryforwards not been available.
At December 31, 1996, the Company had approximately $216,000,000 in federal net
operating loss carryforwards, which begin to expire in 1998 and fully expire in
2005 if not used. In addition, the Company had $6,500,000 in investment tax
credit and research and development credit carryforwards available to reduce
future federal income taxes. (see "Year Ended December 31, 1996 - Corporate"
above).
Inflation and changing prices have not had a material impact on the Company's
results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Available Resources. The Company's consolidated unrestricted cash positions at
December 31, 1996 and 1995 were $0. The Company has a cash management system
whereby cash generated by operations is immediately used to reduce debt. The
immediate reduction of outstanding debt provides the Company with a reduction in
interest expense greater than the interest income that the cash could safely
earn from alternative investments. Working capital needs, when they arise, are
met by daily borrowings.
During 1996, the Company had cash flow from operations of $4,200,000 which,
along with the $1,075,000 proceeds from the sale of the Vernon, Connecticut
Abdow's Restaurant and net borrowings of $7,112,000 on the bank line of credit,
funded the purchase of property, plant and equipment totalling $3,108,000
(including the one new Restaurant opened in 1996), a loan to ELX Limited
Partnership ("ELX") totalling $909,000, the purchase of related party debt with
a face amount of $6,650,000 from Bank of America Illinois for $5,850,000;
principal payments of long-term 14.5% and 15% senior subordinated notes
totalling $1,199,000; the repurchase of Common Stock and Warrants to purchase
Common Stock for $1,146,000; and principal payments on capital leases of
$139,000. During 1996, current assets increased by $4,249,000 primarily due to
an increase in Cues's inventory, the recording of a deferred tax asset, an
increase in Bickford's and Corporate's accounts receivable related to an
insurance settlement related to a Restaurant fire in 1996, partially offset by a
decrease in the asset held for sale due to the sale of the Vernon, Connecticut
Abdow's restaurant. Inventory increased due to the introduction and development
of new products, a general increase in component parts used in production and an
increase in finished assemblies. Current liabilities decreased in 1996 by
$750,000 (excluding the current portion of the long-term debt and current
portion of long-term capital leases).
During 1995, the Company had cash flow from operations of $4,003,000, which
along with net borrowings of $2,334,000 in long-term debt funded the purchase of
property, plant and equipment totalling $2,357,000 (including the one new
Restaurant opened in 1995); the net cost
22
of acquiring the fifteen Abdow's totalling $2,575,000; the repurchase of Common
Stock of $1,224,000; the payment of bank fees of $125,000; and the principal
payments on capital leases of $56,000. During 1995, current assets increased by
$4,034,000, primarily due to an increase in Cues's inventory and the recording
of an asset held for sale at December 31, 1995 related to the Vernon,
Connecticut Abdow's restaurant. The Restaurant was sold on February 1, 1997 for
cash. Inventory increased due to the introduction and development of new
products and an increase in equipment used for demonstrations. The increase in
current assets was partially offset by an increase in current liabilities of
$647,000 (excluding the current portion of the long-term debt and current
portion of long-term capital leases).
During 1994, the Company had cash flow from operations of $6,871,000, which
along with a net borrowing of $225,000 in long-term debt funded the acquisition
of property, plant and equipment totalling $2,363,000 (including the two new
Restaurants opened in 1994); a loan to ELX of $1,156,000; the repurchase of
Common Stock and Series A Warrants to purchase Common Stock of $3,499,000; and
the payment of bank fees of $109,000. During 1994, current assets increased by
$286,000, primarily due to an increase in Cues's inventory partially offset by a
decline in Cues's accounts receivable and a decrease in Bickford's Division
prepaid expenses. Inventory increased due to increased monthly production volume
caused by increased sales orders at Cues and the introduction and development of
new products. The increase in current assets was partially offset by an increase
in current liabilities of $136,000 (excluding the current portion of the
long-term debt and current portion of long-term capital leases).
Future Needs For and Sources of Capital. Management believes that cash generated
by operations is sufficient to fund current operations including the interest
payments on the bank debt. With bank approval, excess funds are available under
the Company's loan agreement to finance additional acquisitions.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company for each of the fiscal
years in the three-year period ended December 31, 1996, together with the report
thereon of Price Waterhouse LLP dated March 20, 1997, are included in this
report commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The Company did not change its independent accountants during 1996 nor were
there any disagreements with such accountants on accounting principals or
practices, financial disclosure or auditing scope or procedure.
23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under this item is incorporated herein by reference
from the ELXSI Corporation Proxy Statement to be filed within 120 days after
December 31, 1996 for the annual Meeting of Stockholders to be held May 22,
1997.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is incorporated herein by reference
from the ELXSI Corporation Proxy Statement to be filed within 120 days after
December 31, 1996 for the annual Meeting of Stockholders to be held May 22,
1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required under this item is incorporated herein by reference
from the ELXSI Corporation Proxy Statement to be filed within 120 days after
December 31, 1996 for the annual Meeting of Stockholders to be held May 22,
1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item is incorporated herein by reference
from the ELXSI Corporation Proxy Statement to be filed within 120 days after
December 31, 1996 for the annual Meeting of Stockholders to be held May 22,
1997.
24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
Index to Consolidated Financial Statements
- ------------------------------------------
Page
Number(s)
---------
1. Financial Statements
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets at December 31, 1996 and 1995 F-2 to F-3
Consolidated Income Statements for the three years
ended December 31, 1996 F-4
Consolidated Statements of Stockholders' Equity for the
three years ended December 31, 1996 F-5
Consolidated Statements of Cash Flows for the three years
ended December 31, 1996 F-6 to F-7
Notes to Consolidated Financial Statements F-8 to F-25
2. Financial Statement Schedules
Schedule
Number Description Page
------ ----------- ----
VIII Valuation and Qualifying Accounts and Reserves S-1
All other schedules are omitted because they are not applicable or not required,
or because the required information is included in the Consolidated Financial
Statements or Notes thereto.
3. Exhibits
Exhibit
Number Description
- ------ -----------
2.1 Agreement and Plan of Merger by and among ELXSI Corporation, ELXSI,
Cadmus Corporation and Holdingcues, Inc. dated as of October 16, 1992,
including form of Series C Warrant. (Incorporated herein by reference
to Exhibit 2.7 of the Company's Current Report on Form 8-K as filed
November 13, 1992 (File No 0-11877)).
2.2 Family Restaurant Sale and Purchase Agreement, between Marriott Family
Restaurants, Inc. ("Marriott") and the Company dated February 28,
1991. (Incorporated herein by reference to Exhibit 2.1 of the
Company's Current Report on Form 8-K, dated July 16, 1991 (File No.
0-11877)).
25
2.3 Side Letter to the Family Restaurant Sale and Purchase Agreement
between Marriott and the Company dated February 28, 1991.
(Incorporated herein by reference to Exhibit 2.2 of the Company's
Current Report on Form 8-K, dated July 16, 1991 (File No. 0-11877)).
2.4 Assignment and Guaranty of Family Restaurants Sale and Purchase
Agreement and Side Letter, between the Company, Marriott and ELXSI
dated June 29, 1991. (Incorporated herein by reference to Exhibit 2.3
of the Company's Current Report on Form 8-K, dated July 16, 1991 (File
No. 0-11877)).
2.5 Closing Side Letter Agreement Regarding Family Restaurants Sale and
Purchase Agreement between ELXSI and Marriott dated July 1, 1991.
(Incorporated herein by reference to Exhibit 2.4 of the Company's
Current Report on Form 8-K, dated July 16, 1991 (File No. 0-11877)).
2.6 Real Estate Closing Side Letter Agreement Regarding Family Restaurants
Sale and Purchase Agreement between ELXSI and Marriott dated July 1,
1991. (Incorporated herein by reference to Exhibit 2.5 of the
Company's Current Report on Form 8-K, dated July 16, 1991 (File No.
0-11877)).
2.7 Agreement Concerning Massachusetts and Connecticut Liquor Licenses
between ELXSI and Marriott dated July 1, 1991. (Incorporated herein by
reference to Exhibit 2.6 of the Company's Current Report on Form 8-K,
dated July 16, 1991 (File No. 0-11877)).
3.1 Restated Certificate of Incorporation of the Company, as amended.
(Incorporated herein by reference to Exhibit 3.1 of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1989
(file No. 0-11877)).
3.2 Certificate of Amendment of Restated Certificate of Incorporation of
the Company dated May 27, 1992. (Incorporated herein by reference to
Exhibit 3.2 of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994 (file No. 0-11877)).
3.3 Bylaws of the Company. (Incorporated herein by reference to Exhibit
3.1 of the Company's Registration Statement on Form S-4, as amended.
(file No. 0-11877)).
4.1 Series A Warrant No. A-7 to purchase 50,000 shares of Common Stock
issued to Eliot Kirkland L.L.C. ("EKLLC").
4.2 Form of Allonge and Amendment to Series A Warrants of ELXSI
Corporation, with respect to the foregoing Warrant.
4.3 Series A Warrant No. A-6 to purchase 150,500 shares of Common Stock
issued to the Alexander M. Milley Irrevocable Trust I U/A dated May 9,
1994. (Incorporated herein by reference to Exhibit 4.2 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 (file No. 0-11877)).
4.4 Form of Allonge and Amendment to Series A Warrants of ELXSI
Corporation, with respect to the foregoing Warrant.
4.5 Series B Warrant No. B-1 to purchase 604,656 shares of Series A
Non-Voting Convertible Preferred Stock issued to Continental Illinois
Equity Corporation ("CIEC") (now named BankAmerica Capital Corporation
("BACC")). (Incorporated herein by reference to Exhibit 4.6 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989 (file No. 0-11877)).
26
4.6 Series C Warrant No. C-3 to purchase 68,762 shares of Common Stock
issued to EKLLC.
4.7 Form of Allonge and Amendment to Series C Warrants of ELXSI
Corporation, with respect to the foregoing Warrant.
4.8 Amended and Restated Registration Rights Agreement dated as of January
23, 1990 among the Company, Milley & Company ("M&C") and CIEC.
(Incorporated herein by reference to Exhibit 4.7 of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1989
(file No. 0-11877)).
4.9 Exercise of Option and Assignment of Registration Rights executed by
ELX Limited partnership ("ELX") and The Airlie Group, L.P. ("Airlie")
dated November 30, 1994. (Incorporated herein by reference to Exhibit
4.6 of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 (file No. 0-11877)).
4.10 15% Senior Subordinated Note issued by the Company to CIEC in the
amount of $401,765.00. (Incorporated herein by reference to Exhibit
10.18 of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1989 (file No. 0-11877)).
4.11 14.5% Senior Subordinated Note issued by the Company to CIEC in the
amount of $502,206.25 dated June 27, 1991. (Incorporated herein by
reference to Exhibit 4.8 of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994 (file No. 0-11877)).
4.12 Amended and Restated Loan and Security Agreement, dated as of December
30, 1996, between ELXSI and Bank of America Illinois ("BAI").
4.13 Warrant Purchase and Senior Subordinated Note termination Agreement,
dated as of December 30,1996, between BACC and the Company.
4.14 14.5% Senior Subordinated Note issued by the Company to Pan Fixed
Income Fund, Ltd., dated as of November 16, 1993 in the amount of
$250,000. (Incorporated herein by reference to Exhibit 4.12 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 (file No. 0-11877)).
4.15 14.5% Senior Subordinated Note issued by the Company to Rona Jaffe,
dated as of November 16, 1993 in the amount of $100,000. (Incorporated
herein by reference to Exhibit 4.13 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994 (file No.
0-11877)).
4.16 14.5% Senior Subordinated Note issued by the Company to Anne Strassler
A.C.S.W. P.C., dated as of November 16, 1993 in the amount of $25,000.
(Incorporated herein by reference to Exhibit 4.14 of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1994
(file No. 0-11877)).
10.1 The Company's 1987 Incentive Stock Option Plan as amended.
(Incorporated by reference to Exhibit 10.1 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1987 (file
No. 0-11877)).
10.2 The Company's 1987 Supplemental Stock Option Plan as amended.
(Incorporated by reference to Exhibit 10.2 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1987 (file
No. 0-11877)).
10.3 The Company's 1993 Incentive Stock Option Plan. (Incorporated herein
by reference to Exhibit 10.3 of the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1994 (file No. 0-11877)).
27
10.4 The Company's 1995 Incentive Stock Option Plan (Incorporated herein by
reference to Exhibit 4.1 to the Company's Form S-8 Registration
Statement filed November 14, 1995 (Registration No. 033-64205)).
10.5 The Company's 1996 Incentive Stock Option Plan (Incorporated herein by
reference to Exhibit 4.1 to the Company's Form S-8 Registration
Statement filed December 2, 1996 (Registration No. 333-17131)).
10.6 The ELXSI 1991 Phantom Stock Option Plan for the management of the
Bickford's Division. (Incorporated herein by reference to Exhibit 10.4
of the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 (file No. 0-11877)).
10.7 Amendment No. 1 to the ELXSI 1991 Phantom Stock Option Plan for the
management of the Bickford's Division. (Incorporated herein by
reference to Exhibit 10.5 of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994 (file No. 0-11877)).
10.8 Non-Qualified Stock Option Agreement issued to Robert C. Shaw for the
purchase of 12,500 shares of Common Stock, dated October 30, 1992.
(Incorporated herein by reference to Exhibit 10.7 of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1994
(file No. 0-11877)).
10.9 Non-Qualified Stock Option Agreement issued to John C. Savage for the
purchase of 10,000 shares of Common Stock, dated October 30, 1992.
(Incorporated herein by reference to Exhibit 10.8 of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1994
(file No. 0-11877)).
10.10 Non-Qualified Stock Option Agreement issued to Farrokh K. Kavarana for
the purchase of 10,000 shares of Common Stock, dated October 30, 1992.
(Incorporated herein by reference to Exhibit 10.9 of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1994
(file No. 0-11877)).
10.11 Non-Qualified Stock Option Agreement issued to Kevin P. Lynch for the
purchase of 20,000 shares of Common Stock, dated October 30, 1992.
(Incorporated herein by reference to Exhibit 10.10 of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1994
(file No. 0-11877)).
10.12 Non-Qualified Stock Option Agreement issued to Alexander M. Milley for
the purchase of 30,000 shares of Common Stock, dated October 30, 1992.
(Incorporated herein by reference to Exhibit 10.11 of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1994
(file No. 0-11877)).
10.13 Non-Qualified Stock Option Agreement issued to Thomas R. Druggish for
the purchase of 12,500 shares of Common Stock, dated October 30, 1992.
(Incorporated herein by reference to Exhibit 10.12 of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1994
(file No. 0-11877)).
10.14 Stock and Note Purchase Agreement dated as of August 31, 1989 by and
among the Company, Airlie and M&C. (Incorporated herein by reference
to Exhibit 2.1 of the Company's Current Report on Form 8-K as filed
October 3, 1989 (File No 0-11877)).
28
10.15 Stock and Note Purchase Agreement dated as of January 23, 1990 among
Airlie, CIEC and M&C. (Incorporated herein by reference to Exhibit
10.14 of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 (file No. 0-11877)).
10.16 Management Agreement ("Management Agreement") between Winchester
National, Inc. (d/b/a as M&C) and the Company dated September 25,
1989. (Incorporated herein by reference to Exhibit 10.21 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1991 (file No. 0-11877)).
10.17 Assignment of Management Agreement dated June 28, 1991 among the
Company, Winchester National, Inc., ELXSI and MMI. (Incorporated
herein by reference to Exhibit 10.16 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994 (file No.
0-11877)).
10.18 Management Agreement Extension dated September 25, 1992 between ELXSI
and MMI. (Incorporated herein by reference to Exhibit 10.17 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 (file No. 0-11877)).
10.19 Assignment to Cadmus Corporation ("Cadmus"), dated January 1, 1994 of
MMI's rights under the extended Management Agreement dated September
25, 1992, as amended between ELXSI and MMI. (Incorporated herein by
reference to Exhibit 10.18 of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994 (file No. 0-11877)).
10.20 Promissory Note of ELX payable to the Company dated December 8, 1994
in the amount of $1,155,625.00 due December 8, 1997. (Incorporated
herein by reference to Exhibit 10.6 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994 (file No.
0-11877)).
10.21 Form of Stock Purchase and Option Exercise Agreement, dated as of
December 30, 1996, between BACC and ELX (Incorporated herein by
reference to Exhibit D to the Amendment No. 10 to the Schedule 13D of
Alexander M. Milley, MMI, ELX, Cadmus and EKLLC, dated January 7,
1997, filed in respect of the Company's Common Stock).
10.22 Form of Promissory Note of ELX payable to the Company, dated December
30, 1996, in the amount of $909,150 due on December 30, 1999
(Incorporated herein by reference to Exhibit E to the Amendment No. 10
to the Schedule 13D of Alexander M. Milley, MMI, ELX, Cadmus and
EKLLC, dated January 7, 1997, filed in respect of the Company's Common
Stock).
10.23 Form of Recapitalization Agreement, dated as of December 30, 1996,
among Azimuth Corporation ("Azimuth"), Delaware Electro Industries,
Inc. ("DEI"), Contempo Design, Inc. ("CDI"), Contempo Design West,
Inc. ("CDW"), ELXSI and BAI (Incorporated herein by reference to
Exhibit F to the Amendment No. 10 to the Schedule 13D of Alexander M.
Milley, MMI, ELX, Cadmus and EKLLC, dated January 7, 1997, filed in
respect of the Company's Common Stock).
10.24 Second Amended and Restated Loan and Security Agreement, dated as of
October 9, 1995, between Azimuth and BAI.
10.25 Loan and Security Agreement, dated as of October 9, 1995, between DEI
and BAI.
10.26 Loan and Security Agreement, dated as of October 9, 1995, between CDI
and BAI.
10.27 Loan and Security Agreement, dated as of October 9, 1995, between CDW
and BAI.
29
10.28 First Omnibus Amendment, dated as of August 9, 1996, among Azimuth,
DEI, CDI, CDW and BAI.
10.29 Second Omnibus Amendment, dated as of September 23, 1996, among
Azimuth, DEI, CDI, CDW and BAI.
10.30 Third Omnibus Amendment, dated as of November 27, 1996, among Azimuth,
DEI, CDI, CDW and BAI.
10.31 Second Amended and Restated Guaranty, dated as of October 9, 1995,
made by DEI, CDI and CDW in favor of BAI.
10.32 Second Amended and Restated Pledge Agreement, dated as of October 9,
1995, among Azimuth, DEI, CDI, CDW and BAI.
21.1 Subsidiaries of the Company. (Incorporated by reference to Exhibit
22.1 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1990 (file No. 0-11877)).
23.1 Consent of Price Waterhouse LLP
27 Financial Data Schedule
(b) Reports on Form 8-K
None
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
ELXSI CORPORATION
BY: /s/ Alexander M. Milley
--------------------------------
Alexander M. Milley
Chairman of the Board, President
and Chief Executive Officer
Dated: March 24, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Alexander M. Milley Chairman of the Board, March 24, 1997
- ----------------------------------- President and Chief Executive
Alexander M. Milley Officer (Principal Executive Officer)
/s/ Robert C. Shaw Director and Vice President March 25, 1997
- -----------------------------------
Robert C. Shaw
/s/ Thomas R. Druggish Vice President, Treasurer March 24, 1997
- ----------------------------------- and Secretary (Chief
Thomas R. Druggish Accounting Officer and
Principal Financial Officer)
/s/ Kevin P. Lynch Director and Vice President March 24, 1997
- -----------------------------------
Kevin P. Lynch
/s/ Farrokh K. Kavarana Director March 24, 1997
- -----------------------------------
Farrokh K. Kavarana
/s/ Denis M. O'Donnell Director March 24, 1997
- -----------------------------------
Denis M. O'Donnell
31
Report of Independent Certified Public Accountants
To the Board of Directors and Shareholders of
ELXSI Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 25, present fairly, in all
material respects, the financial position of ELXSI Corporation and its
subsidiary at December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
- ------------------------
Price Waterhouse LLP
Orlando, Florida
March 20, 1997
F-1
ELXSI CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
A S S E T S
December 31, December 31,
1996 1995
-------------- -------------
Current assets:
Accounts receivable, less allowance for
doubtful accounts of $54 and $58 in 1996
and 1995, respectively $ 3,425 $ 2,776
Inventories 11,017 8,477
Prepaid expenses and other current assets 234 397
Note receivable - related party 1,156 --
Deferred tax asset 1,142 --
Asset held for sale -- 1,075
-------------- -------------
Total current assets 16,974 12,725
Property, buildings and equipment, net 27,677 27,458
Intangible assets, net 5,525 5,703
Deferred debt costs, net 76 212
Notes receivable - related party 6,759 1,156
Deferred tax asset - noncurrent 1,739 --
Other 728 445
-------------- -------------
Total assets $ 59,478 $ 47,699
============== =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
ELXSI CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Data)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, December 31,
1996 1995
-------------- -------------
Current liabilities:
Accounts payable $ 3,266 $ 4,269
Accrued expenses 4,649 4,396
Capital lease obligations - current 142 137
Current portion of long-term debt 268 1,485
-------------- -------------
Total current liabilities 8,325 10,287
Capital lease obligations - non current 1,588 1,732
Long-term debt, net of discount 18,706 11,570
Other non current liabilities 1,946 1,396
-------------- -------------
Total liabilities 30,565 24,985
-------------- -------------
Commitments and contingencies (Note 8) -- --
-------------- -------------
Stockholders' equity:
Preferred Stock, Series A Non-voting
Convertible, par value $0.002 per share
Authorized--5,000,000 shares
Issued and outstanding--none -- --
Common Stock, par value $0.001 per share
Authorized--160,000,000 shares
Issued and outstanding--4,660,869
at December 31, 1996 and 4,792,353
at December 31, 1995 5 5
Additional paid-in-capital 228,520 229,666
Accumulated deficit (199,512) (206,895)
Cumulative foreign currency translation adjustment (100) (62)
-------------- -------------
Total stockholders' equity 28,913 22,714
-------------- -------------
Total liabilities and stockholders' equity $ 59,478 $ 47,699
============== =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
ELXSI CORPORATION
CONSOLIDATED INCOME STATEMENTS
(Amounts in Thousands, Except Per Share Data)
Year Ended December 31,
-------------------------------------------------------
1996 1995 1994
-------------- ------------- -------------
Net sales $ 82,743 $ 74,674 $ 62,423
Costs and expenses:
Cost of sales 66,603 58,347 47,440
Selling, general and administrative 7,362 7,484 6,630
Depreciation and amortization 2,775 2,206 1,794
-------------- ------------- -------------
Operating income 6,003 6,637 6,559
Other income (expense):
Interest income 111 125 8
Interest expense (1,495) (1,767) (1,426)
Other income (expense) 432 65 (41)
-------------- ------------- -------------
Income before income taxes 5,051 5,060 5,100
Benefit (provision) for income taxes 2,332 (514) (366)
-------------- ------------- -------------
Net income $ 7,383 $ 4,546 $ 4,734
============== ============= =============
Net income per common share $ 1.51 $ 0.89 $ 0.79
============== ============= =============
Weighted average number of common
and common equivalent shares 4,902 5,093 6,014
============== ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
ELXSI CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands)
Cumulative
Foreign
Additional Accum- Currency
Common Paid-In- ulated Translation
Stock Capital Deficit Adjustment
----------- ------------- ------------- -----------
Balance at December 31, 1993 $ 5 $ 234,331 $ (216,175) $ (35)
Foreign currency translation
adjustment -- -- -- (21)
Purchase and retirement of 354,963
shares of Common Stock and
warrants to purchase 761,638
shares of Common Stock -- (3,499) -- --
Exercise of Common Stock options
to purchase 18,400 shares of
Common Stock -- 58 -- --
Net income -- -- 4,734 --
----------- ------------- ------------- -----------
Balance at December 31, 1994 5 230,890 (211,441) (56)
Foreign currency translation
adjustment -- -- -- (6)
Purchase and retirement of 240,000
shares of Common Stock -- (1,224) -- --
Net income -- -- 4,546 --
----------- ------------- ------------- -----------
Balance at December 31, 1995 5 229,666 (206,895) (62)
Foreign currency translation
adjustment -- -- -- (38)
Purchase and retirement of 131,500
shares of Common Stock and
warrants to purchase preferred
stock convertible into 241,862
shares of Common Stock -- (1,146) -- --
Net income -- -- 7,383 --
----------- ------------- ------------- -----------
Balance at December 31, 1996 $ 5 $ 228,520 $ (199,512) $ (100)
=========== ============= ============= ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
ELXSI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Year Ended December 31,
----------------------------------------------
1996 1995 1994
----------- ----------- -----------
Cash flows provided by operating activities:
Net income $ 7,383 $ 4,546 $ 4,734
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,775 2,206 1,794
Amortization of deferred debt costs 166 213 126
Amortization of debt discount 12 19 90
Loss on disposal of equipment 292 54 7
Other (38) (6) (21)
(Increase) decrease in assets:
Accounts receivable (649) (498) 301
Inventories (2,540) (2,269) (794)
Prepaid expenses and other current assets 163 (192) 207
Deferred tax asset (2,881) -- --
Other (283) (242) (9)
(Decrease) increase in liabilities:
Accounts payable (1,003) 253 305
Accrued expenses 253 394 281
Other current liabilities -- -- (450)
Other non current liabilities 550 600 300
----------- ----------- -----------
Net cash provided by operating activities 4,200 5,078 6,871
----------- ----------- -----------
Cash flows used in investing activities:
Proceeds from sale of Abdow's Restaurant 1,075 -- --
Acquisition of asset held for sale -- (1,075) --
Acquisition of Abdow's Restaurants -- (2,575) --
Purchase of property, building and equipment (3,108) (2,357) (2,363)
Notes receivable - related party (6,759) -- (1,156)
----------- ----------- -----------
Net cash used in investing activities (8,792) (6,007) (3,519)
----------- ----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
ELXSI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in Thousands)
Year Ended December 31,
----------------------------------------------
1996 1995 1994
----------- ----------- -----------
Cash flows provided by (used in) financing activities:
Net borrowings on line of credit 7,112 2,429 3,446
Payments of long-term senior subordinated debt (1,199) (83) (3,221)
Payments of long-term debt (6) (12) --
Purchase of Common Stock and warrants to
purchase Common Stock (1,146) (1,224) (3,499)
Proceeds from exercise of Common Stock
options -- -- 58
Payment of deferred bank fee (30) (125) (109)
Principal payments on capital lease obligations (139) (56) (27)
----------- ----------- -----------
Net cash provided by (used in) financing activities 4,592 929 (3,352)
----------- ----------- -----------
Decrease in cash and cash equivalents -- -- --
Cash and cash equivalents, beginning of period -- -- --
----------- ----------- -----------
Cash and cash equivalents, end of period $ -- $ -- $ --
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ 1,411 $ 1,544 $ 1,324
Taxes 747 563 455
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
ELXSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 1. The Company
General. Prior to 1990, ELXSI Corporation (together with its subsidiaries, the
"Company") operated principally through its wholly-owned California subsidiary,
ELXSI. During that period, the principal business of ELXSI was the design,
manufacture, sale and support of minisupercomputers. In July 1989, the Company
announced a major restructuring of its computer operations. In September 1989,
the Company discontinued all computer operations.
In September 1989 and January 1990, the Company entered into agreements with,
and between, The Airlie Group L.P. ("Airlie"), BankAmerica Capital Corporation
("BACC") (formerly named Continental Illinois Equity Corporation), and Milley &
Company ("M&C") (hereinafter referred to collectively as the "Buyers"); whereby
the Buyers acquired 960,000 shares of the Company's Common Stock for $3,000,000
in cash. In addition, the Buyers loaned the Company $2,000,000 (see Note 6).
Subsequent to these transactions, the Company announced its intention of
pursuing an active program of identifying, acquiring and managing middle market
companies.
On July 1, 1991, ELXSI acquired thirty Bickford's Restaurants and twelve Howard
Johnson's Restaurants from Marriott Family Restaurants, Inc. These Restaurants
are located in Massachusetts, Vermont, New Hampshire, Rhode Island and
Connecticut.
Between 1992 and 1995, ELXSI sold six of its Howard Johnson's Restaurants,
converted five others into Bickford's Restaurants, opened seven new Bickford's
Restaurants, acquired 16 Abdow's Family Restaurants ("Abdow's"), and converted
two of the Abdow's into Bickford's Restaurants. During 1996, ELXSI sold one
Abdow's, closed one Abdow's, converted seven Abdow's into Bickford's and opened
one new Bickford's Restaurant. At December 31, 1996, ELXSI operated 52
Bickford's Restaurants, five Abdow's and one Howard Johnson's Restaurant, (the
"Restaurants" or "Restaurant Division").
On October 30, 1992, ELXSI acquired Cues, Inc. of Orlando, Florida and its two
wholly-owned subsidiaries Knopafex, Ltd., a Canadian company, and Cues B.V., a
Dutch company, collectively referred to as "Cues".
Cues is engaged in the manufacture and servicing of video inspection and repair
equipment for wastewater and drainage systems primarily for governmental
municipalities, service contractors and industrial users.
NOTE 2. Summary of Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements include the
accounts of ELXSI Corporation and its wholly-owned subsidiaries. All material
intercompany accounts and transactions have been eliminated.
Both the Company's corporate functions and Cues Division have fiscal years
consisting of four calendar quarters ending on December 31. The Restaurant
Division's fiscal year consists of four
F-8
13-week quarters (one 52-week period) ending on the last Saturday in December;
this requires that every six or seven years the Restaurant Division add an extra
week at the end of the fourth quarter and fiscal year. This was the case for the
fourth quarter of 1994.
Cash and Cash Equivalents. The Company has a cash management system whereby cash
generated by operations is immediately used to reduce debt. Accordingly, the
Company generally maintains no cash or cash equivalents.
Fair Value of Financial Instruments. The carrying amount of accounts and note
receivable, asset held for sale, accounts payable, accrued expenses and
long-term debt approximates fair value because of the short maturity of those
instruments and the variable nature of the interest rates associated with the
debt.
Inventories. Inventories are stated at the lower of cost or market determined by
the first-in, first-out method.
Property, Buildings and Equipment. Property, buildings and equipment, including
buildings under capital leases, are stated at cost less accumulated depreciation
and amortization. Depreciation and amortization are provided using the
straight-line method. Buildings held pursuant to capital leases are amortized
over the shorter of the term of the respective lease (including extension
options) or the estimated useful life. The estimated lives used are:
Buildings and improvements 30 years
Equipment, furniture and fixtures 7 years
Depreciation and amortization expense for 1996, 1995 and 1994 was $2,597,000,
$2,018,000 and $1,614,000, respectively.
Impairment of Long-Lived Assets. In the event that facts and circumstances
indicate that the carrying value of a long-lived asset, including associated
intangibles may be impaired, an evaluation of recoverability is performed by
comparing the estimated future undiscounted cash flows associated with the
asset's carrying amount to determine if a write-down to market value or
discounted cash flow is required. Statement of Financial Accounting Standard No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS 121"), was adopted by the Financial Accounting
Standards Board ("FASB") in March 1995 and has been implemented by the Company
in 1996. However, since the Company's previous accounting policy was consistent
with the provisions of SFAS 121, there was no impact as a result of adopting the
new standard.
Intangible Assets. The excess of cost over fair value of net assets acquired is
amortized over 35 years using the straight-line method. Amortization expense for
1996, 1995 and 1994 was $150,000, $153,000 and $151,000, respectively.
Management periodically reviews the potential impairment of intangible assets in
order to determine the proper carrying values as of each consolidated balance
sheet date.
Trademarks are amortized over 35 years using the straight-line method.
Amortization expense for 1996, 1995 and 1994 was $28,000, $35,000 and $29,000,
respectively.
F-9
Deferred Debt Costs. Deferred debt costs are amortized over the term of the loan
to interest expense using the effective interest method. As of December 31, 1996
and 1995, $76,000 and $212,000, respectively, remained to be amortized over
future periods. Amortization expense in 1996, 1995 and 1994 was $166,000,
$213,000 and $126,000, respectively.
Use of Estimates. The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Concentration of Credit Risk. The Company's Cues division designs, manufactures
and markets a line of video inspection and repair equipment used by governmental
municipalities, service contractors and industrial users for underground sewer
lines. Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily accounts receivable and notes
receivable. The Company performs ongoing credit evaluations of its customers'
financial condition and, generally, requires no collateral from its customers.
The allowance for non-collection of accounts receivable is based upon the
expected collectibility of all accounts receivable.
During 1996, ELXSI entered into an agreement pursuant to which it extended a
revolving line of credit in the amount of $9,650,000 at 15% annual interest to
subsidiaries of Azimuth Corporation, a related party (see NOTE 6). As of
December 31, 1996, the aggregate outstanding balance on the underlying revolving
notes was $6,650,000. The revolving notes are collateralized by substantially
all of the assets of Azimuth Corporation and its Subsidiaries, including
accounts receivable and inventories. The Company does not believe there exists a
substantial credit risk related to this transaction.
The Company does not rely on any one vendor or supplier for its raw materials
within each of its operating divisions, and management believes that other
suppliers could provide for the Company's needs on comparable terms.
Foreign Currency Translation. The assets and liabilities of the Canadian and
Dutch subsidiaries of Cues are translated into U.S. dollars at year-end exchange
rates, and revenue and expense items are translated at average rates of exchange
prevailing during the year. Resulting translation adjustments are accumulated in
a separate component of stockholders' equity.
Income Taxes. The Company has adopted Statement of Financial Accounting
Standards Number 109 "Accounting For Income Taxes" ("SFAS 109"). This Statement
provides for accounting for taxes under an asset and liability approach. This
approach requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the carrying
amounts and the tax basis of other assets and liabilities. Temporary differences
giving rise to deferred tax assets and liabilities include certain accrued
liabilities and net operating loss carryforwards. The provision for income taxes
includes the amount of income taxes payable for the year as determined by
applying the provisions of the current tax law to the taxable income for the
year and the net change during the year in the Company's deferred tax assets and
liabilities. In determining the amount of any valuation allowance required to
offset deferred tax assets, an assessment is made that includes anticipating
future income, in determining the likelihood of realizing deferred tax assets
(see NOTE 5).
F-10
Advertising. Advertising costs, included in selling, general and administrative
expense, are expensed as incurred and totalled $975,000, $862,000 and $753,000
in 1996, 1995 and 1994, respectively.
Reclassification. The Company has recorded certain reclassifications in prior
years to be consistent with the current years presentation.
Accounting for Stock-Based Compensation. In October 1995, the FASB adopted
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which governs the accounting for stock-based
compensation plans, including employee stock options. The statement allows
companies the choice of adopting a new fair value based method of accounting for
such plans that included expensing related compensation cost in the income
statement, or continuing to apply the method specified under preexisting
guidelines under which generally no compensation expense is recorded. If
companies elect to follow preexisting guidelines, the new statement requires
that the notes to the financial statements include pro forma information on net
income and earnings per share as if the fair value based method were being used.
The Company has elected to continue to measure compensation expense under the
preexisting guidelines. Pro forma information relating to stock-based
compensation is presented in Note 11.
Net Income Per Common Share. Net income per common share is computed using the
weighted average number of common shares and, when dilutive, common equivalent
shares outstanding during the respective periods.
NOTE 3. Acquisitions
On July 3, 1995, ELXSI acquired 16 Abdow's Family Restaurants from Abdow
Corporation of Springfield, MA, for approximately $3,800,000 (including expenses
of approximately $300,000). The acquisition was financed by an increase in
ELXSI's existing line of credit with the Bank of America Illinois. The
transaction involved the leasing of the 16 restaurant sites and the purchase of
associated assets located in western Massachusetts and central Connecticut.
ELXSI converted nine of the Abdow's locations into Bickford's Restaurants during
1995 and 1996. Shortly after the acquisition, ELXSI negotiated the sale of the
Vernon, Connecticut Abdow's Restaurant for a net sales price of approximately
$1,225,000, which approximated the fair market value of the Restaurant on the
date of its acquisition by ELXSI. The balance of the receivable from the sale is
reflected as an asset held for sale at December 31, 1995. The balance of the
purchase price of $2,575,000 was allocated to the equipment, leasehold
improvements and leasehold interests of the remaining 15 Abdow's restaurants.
The sale of the Vernon Connecticut, Abdow's Restaurant was consummated on
February 1, 1996. During 1996, ELXSI closed one under-performing Abdow's
Restaurant.
F-11
NOTE 4. Composition of Certain Financial Statement Components
Year Ended December 31,
----------------------------------
1996 1995
------------- -------------
Inventories:
Raw materials and finished goods $ 7,734,000 $ 5,715,000
Work in process 3,283,000 2,762,000
------------- -------------
$ 11,017,000 $ 8,477,000
============= =============
Property, buildings and equipment:
Land $ 7,298,000 $ 7,298,000
Buildings and improvements 14,817,000 14,696,000
Buildings held pursuant to capital leases 1,671,000 1,671,000
Equipment, furniture and fixtures 12,544,000 10,080,000
------------- -------------
36,330,000 33,745,000
Accumulated depreciation and amortization (8,653,000) (6,287,000)
------------- -------------
$ 27,677,000 $ 27,458,000
============= =============
Intangible assets:
Excess of cost over fair value of
net assets acquired $ 5,249,000 $ 5,249,000
Trademarks 1,030,000 1,030,000
Liquor licenses 85,000 85,000
------------- -------------
6,364,000 6,364,000
Accumulated amortization (839,000) (661,000)
------------- -------------
$ 5,525,000 $ 5,703,000
============= =============
The excess of cost over fair value of net assets acquired, trademarks and liquor
licenses represent the value assigned to these intangible assets upon the
acquisition of the Restaurants and Cues by ELXSI.
Year Ended December 31,
---------------------------------
1996 1995
------------ -------------
Accrued expenses:
Accrued salaries, benefits and vacation $ 1,513,000 $ 1,452,000
Other taxes 587,000 678,000
Accrued insurance 461,000 304,000
Accrued professional fees 301,000 146,000
Accrued utilities 293,000 306,000
Accrued rents 214,000 233,000
Warranty accrual 180,000 180,000
Other reserves 175,000 355,000
Accrued royalty 128,000 72,000
Accrued management fees - related party 119,000 18,000
State and federal income taxes 54,000 6,000
Accrued interest and bank fees 31,000 126,000
Accrued acquisition costs 26,000 56,000
Other accrued expenses 567,000 464,000
------------ -------------
$ 4,649,000 $ 4,396,000
============ =============
F-12
NOTE 5. Income Taxes
Pre-tax income for the years ended December 31, 1996, 1995 and 1994 is as
follows:
1996 1995 1994
------------- ------------- -------------
Domestic $ 5,000,000 $ 4,941,000 $ 4,911,000
Foreign 51,000 119,000 189,000
------------- ------------- -------------
Total $ 5,051,000 $ 5,060,000 $ 5,100,000
============= ============= =============
Income tax benefit (expense) for the years ended December 31, 1996, 1995 and
1994 is as follows:
Year Ended December 31,
---------------------------------------------
1996 1995 1994
------------- ------------- -------------
Current:
Federal $ (105,000) $ (118,000) $ (88,000)
State and local (444,000) (396,000) (278,000)
------------- ------------- -------------
(549,000) (514,000) (366,000)
------------- ------------- -------------
Deferred:
Federal 2,881,000 -- --
State and local -- -- --
------------- ------------- -------------
2,881,000 -- --
------------- ------------- -------------
Total $ 2,332,000 $ (514,000) $ (366,000)
============= ============= =============
Deferred tax (liabilities) assets are comprised of the following at December 31,
1996 and 1995:
1996 1995
------------- ------------
Accrued expenses and other $ (1,245,000) $ (1,422,000)
------------- ------------
Gross deferred tax liabilities (1,245,000) (1,422,000)
------------- ------------
Syndication costs -- 1,662,000
Acquisition costs -- 421,000
Accrued expenses and other 814,000 1,380,000
Loss carryforwards 73,440,000 75,217,000
Credit carryforwards 6,851,000 6,730,000
------------- ------------
Gross deferred tax assets 81,105,000 85,410,000
------------- ------------
Deferred tax asset valuation allowance (76,979,000) (83,988,000)
------------- ------------
Net deferred taxes $ 2,881,000 $ --
============= ============
At December 31, 1996 and 1995, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $216 million and $221 million,
respectively. The decrease in the net deferred tax asset primarily resulted from
the use of net operating loss carryforwards to offset 1996 estimated federal
taxable income. The net operating loss carryforwards begin to expire in 1998 and
fully expire in 2005. The Company also has investment tax credit carryforwards
of approximately $3.2 million, research and development tax credit carryforwards
of approximately $3.3 million and minimum tax credit carryforwards of
approximately $230,000.
F-13
The investment tax credit and research and development tax credit carryforwards
expire between 1997 and 2003,and the minimum tax credit carryforwards have an
unlimited carryforward period.
The utilization of the Company's net operating loss and tax credit carryforwards
may be impaired or reduced under certain circumstances. Events which may affect
the Company's ability to utilize these carryforwards include, but are not
limited to, cumulative stock ownership changes of 50% or more over a three-year
period, as defined by Section 382 of the Internal Revenue Code ("IRC"), and the
timing of the utilization of the tax benefit carryforwards. Such changes in
ownership would significantly restrict the Company's ability to utilize loss and
credit carryforwards in accordance with sections 382 and 383 of the IRC. In the
event that a change in ownership does not take place, the Company may be able to
recognize the benefit of additional loss carryforwards. At the end of 1996 and
1995, the Company believed that it would have a change of ownership of 50% or
more.
At December 31, 1995, the Company maintained a 100% valuation allowance to
account for the potential limitations imposed by IRC 382 and 383, as well as to
give effect to uncertainties surrounding the future success of restaurant
acquisitions and manufacturing consolidations undertaken during the year.
During 1996, a portion of the valuation allowance was released based upon the
success of restaurant conversions and manufacturing consolidations which had
begun in 1995. Accordingly, the Company recognized a $2,881,000 net deferred tax
asset. The net deferred tax assets represents the amount of net operating loss
and credit carryforwards, which management believes are more likely than not to
be realized in the future.
A reconciliation of the statutory federal tax rate and the Company's effective
income tax rate for the years ended December 31, 1996, 1995 and 1994 is as
follows:
Year Ended December 31,
-----------------------------------
1996 1995 1994
-------- ------- ------
Federal income tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal benefit 8.6 7.7 5.3
Changes in valuation allowance for federal
deferred tax assets (57.1) -- --
Other 0.3 0.5 (0.1)
Recognition of net operating loss carryforward (32.0) (32.0) (32.0)
-------- ------- ------
Effective income tax rate (46.2)% 10.2% 7.2%
======== ======= ======
NOTE 6. Long-Term Debt and Related Party Transactions
On September 25, 1989, the Company consummated a Stock and Note Purchase
Agreement ("Agreement") with Airlie and M&C, whereby Airlie and M&C loaned the
Company $1,750,000 and $250,000, respectively, for 15% senior subordinated
ten-year notes, and warrants to purchase 1,053,500 and 150,500 shares,
respectively, of the Company's Common Stock. The Company recorded as
paid-in-capital (relating to the warrants) a discount of $301,000 to reflect a
valuation of $0.25 per warrant, which was determined by the Company to represent
the estimated fair market value of the warrants at the inception of the
Agreement. These warrants originally had an exercise price of $3.125 per share,
were immediately exercisable, and originally expired on
F-14
September 30, 1996. The notes bore interest at 15% payable quarterly, commencing
on November 15, 1989. Principal was to be repaid in five annual $400,000
installments commencing on September 25, 1995. In addition, Airlie purchased
960,000 shares of the Company's Common Stock for $3,000,000 in cash and granted
to ELX Limited Partnership ("ELX"), of which the President of the Company is the
sole general partner and other officers of the Company are limited partners, a
currently exercisable seven-year option to purchase up to 480,000 of the 960,000
shares of the Common Stock, at an exercise price of $3.125 per share.
In January 1990, BACC purchased from Airlie 220,400 shares of the Company's
Common Stock as well as $402,000 of the 15% senior subordinated ten-year notes.
In addition, the Company and Airlie modified the warrants, described above, for
the purchase of 1,053,500 shares of the Common Stock of the Company, in that
such warrants were exchanged for two warrants, one exercisable for 811,638
shares of Common Stock and the second exercisable for 604,156 shares of the
Company's Series A Non-Voting Convertible Preferred Stock, convertible, under
certain specified conditions, into 241,862 shares of the Common Stock. The
Series A Non-Voting Convertible Preferred Stock, which was never issued, was to
carry a liquidation preference of $0.002 per share and have no voting rights,
but otherwise were to have substantially the same rights as the Common Stock.
Following the issuance of the two warrants, the warrant for Series A Non-Voting
Convertible Preferred Stock was sold by Airlie to BACC. In addition, the option
to purchase up to 480,000 shares previously granted by Airlie to ELX was amended
to be exercisable for 369,800 shares of Common Stock, and an option to purchase
110,200 shares of Common Stock at a price of $3.125 per share was granted by
BACC to ELX.
On June 27, 1991, in connection with the Bickford's Restaurants purchase,
Airlie, BACC and M&C purchased an additional, $1,685,000, $502,000 and $313,000,
respectively, of the Company's senior subordinated notes. These notes bore
interest at 14.5% and were payable in five annual installments of $500,000
commencing on June 27, 1997.
On November 15, 1993, Airlie sold $500,000 of its 14.5% senior subordinated
notes. In connection with the sale, Milley Management Incorporated ("MMI"), a
management consulting firm, of which the President of the Company is the
President and majority stockholder, acquired 50,000 of the outstanding warrants
previously issued by the Company to Airlie. In addition, Cadmus Corporation
("Cadmus"), whose President and principal owner is Alexander M. Milley,
purchased $125,000 of the senior subordinated notes from Airlie. The remaining
$375,000 was purchased by three unrelated third parties.
On May 19, 1994, the Company purchased all of the 15.0% and 14.5% senior
subordinated notes held by MMI at their face value of approximately $250,000 and
$313,000, respectively. MMI waived all applicable prepayment penalties.
On December 8, 1994, the Company purchased all of the 15.0% and 14.5% senior
subordinated notes then held by Airlie at their face value of approximately
$1,348,000 and $1,185,000, respectively. Airlie waived all applicable prepayment
penalties and the Company agreed to cancel the remaining debt commitment due
from Airlie under the Agreement. In addition to the senior subordinated notes,
the Company purchased from Airlie 354,963 shares of the Company's Common Stock
at $5.25 per share and Airlie's remaining 761,638 warrants to purchase the
Company's common stock for $2.125 per share.
F-15
In conjunction with the above transaction, the Company loaned ELX approximately
$1,156,000, the proceeds of which ELX used to exercise its option to purchase
the 369,800 shares of Common Stock held by Airlie under the existing option
granted to ELX at $3.125 per share. The note bears interest at 1/2% above the
Company's senior debt borrowing rate (see NOTE 7). Principal and interest are
due on December 8, 1997.
On December 8, 1994, Cadmus purchased 50,000 shares of the Company Common Stock
held by Airlie for $5.25 per share. The above transactions occurring on December
8, 1994 represented a complete divestiture of the Company's securities held by
Airlie. The source of the Company's funds was ELXSI's bank line of credit.
On December 30, 1996, the Company purchased all of the 15% and 14.5% senior
subordinated notes held by BACC at their face value of approximately $241,000
and $502,000, respectively. BACC waived all applicable prepayment penalties. In
addition to the senior subordinated notes, the Company purchased and retired
BACC's warrants to purchase the Company's Series A Non-Voting Convertible
Preferred Stock warrant, convertible into 241,862 shares of the Common Stock for
$478,000.
On December 30, 1996, the Company loaned ELX approximately $909,000, the
proceeds of which were used to exercise its option to purchase 110,200 shares
held by BACC under the existing option and to purchase the other 110,200 shares
of Common Stock held by BACC for $5.125 per share. The note bears interest at
1/2% above the Company's senior debt borrowing rate (see NOTE 7). Principal and
interest are due on December 30, 1999. The above transactions occurring on
December 30, 1996 represented a complete divestiture of the Company's securities
held by BACC. The source of the funds was ELXSI's then existing line of credit.
Transactions with Cadmus Corporation. In connection with the Agreement described
above, ELXSI (as assignee of ELXSI Corporation) entered into a management
agreement on September 25, 1989 with M&C, which has most recently been assigned
to Cadmus. The management agreement was extended in 1992 for a minimum of three
additional years and thereafter unless terminated by a majority vote of the
Board of Directors of either party. Certain of the Company's officers and
directors are affiliated with Cadmus. The management agreement provides for
Cadmus to receive, for management services rendered, compensation of $500,000
per year that commenced upon the Company having first achieved operating income
(as defined) of $1,250,000 for a fiscal quarter, plus reimbursement for
reasonable expenses. The fees may be discontinued following a year in which
operating income is less than $4,000,000, but will be reinstated following the
first fiscal quarter in which the Company again attains quarterly operating
income of at least $1,250,000. During 1996, 1995 and 1994, the Company was
charged management fees of $500,000 each year. Cadmus also provides the Company
with certain general and administrative services. During 1996, 1995 and 1994,
the Company was charged $36,000, $36,000 and $41,000, respectively, for such
items. At December 31, 1996 and 1995, accrued expenses include $119,000 and
$18,000, respectively, due to Cadmus under such management agreement.
Transactions with Azimuth Corporation and Subsidiaries. On December 30, 1996,
ELXSI entered into a Recapitalization Agreement with Azimuth Corporation and its
three wholly-owned subsidiaries: Contempo Design, Inc., Contempo Design West,
Inc., and Delaware Electro Industries, Inc. (collectively referred to as the
"Azimuth Subsidiaries"), of which certain of the officers, directors and Azimuth
stockholders are officers and directors of the Company. Under
F-16
the Recapitalization Agreement, ELXSI purchased from BAI three Azimuth
Subsidiary revolving notes (the "Azimuth Subsidiary Notes") which were scheduled
to mature on December 31, 1996. The Notes had a combined face value of
$6,650,000 and were purchased by ELXSI at an $800,000 discount. Under the
Recapitalization Agreement, ELXSI received all contract rights and obligations
held by BAI in relation to the Azimuth Subsidiary Notes and, as a result, became
the provider of a working capital line of credit for the Azimuth Subsidiaries,
which ELXSI agreed to increase to $9,650,000 and extended through June 30, 1998.
The line of credit is collateralized by substantially all of the assets of
Azimuth Corporation.
As of December 30, 1996, the balance due to ELXSI from the Azimuth Subsidiaries
was $6,650,000. Loan balances outstanding from the Azimuth Subsidiaries bear
interest at 15% per annum, payable in arrears on the 1st and 16th of each month,
and mature on June 30, 1998. The $800,000 discount recorded upon purchase of the
Azimuth Subsidiary Notes from BAI has been recorded as a direct reduction to the
face amount of the Azimuth Subsidiary Notes in the accompanying financial
statements. In addition, ELXSI recorded a $225,000 closing fee receivable due
from the Azimuth Subsidiaries under the Recapitalization Agreement, and accrued
certain legal and bank fees payable. ELXSI recorded the net fees in accounts
receivable within the accompanying consolidated financial statements. The
Company will amortize this discount and the net closing fees over the life of
the Azimuth Subsidiary Notes utilizing the effective interest method of
amortization.
NOTE 7. Long-Term Debt
Long-term debt consists of the following:
December 31,
---------------------------
1996 1995
----------- -----------
1. ELXSI
Bank Line of Credit with BAI, $11,790,000 available, interest
due monthly at prime (8.25% at December 31, 1996) or 2% above
London Eurodollar rate (7.68% at December 31, 1996), maturing
on June 30, 1998. The line of credit provides for minimum
reductions in available credit of $2,250,000 annually. The
line is secured by assets of ELXSI, including real estate,
and the outstanding stock of ELXSI. The agreement provides
for commitment fees of 0.3% on the unused portion of the line
of credit. In addition, the agreement restricts the payment
of cash dividends by ELXSI to an amount not to exceed 50% of
the excess cash flow (as defined). 9,784,000 11,709,000
2. ELXSI
Supplemental Bank Line of Credit with BAI, $5,100,000
available, interest due monthly at prime (8.25% at December
31, 1996) or 2% above London Eurodollar rate (7.68% at
December 31, 1996), maturing on June 30, 1998. The line is
utilized to repurchase securities of the Company,
F-17
including stock, warrants and notes and is secured by assets
of ELXSI, including real estate, and the outstanding stock of
ELXSI. The agreement provides for commitment fees of 0.3% on
the unused portion of the line of credit. 3,187,000 --
3. ELXSI
Additional Bank Line of Credit with BAI, $8,850,000
available, interest due monthly at prime (8.25% at December
31, 1996) or 2% above London Eurodollar rate (7.68% at
December 31, 1996), maturing on June 30, 1998. The line was
utilized to purchase the notes payable by the Azimuth
Subsidiaries and can be used to fund their future working
capital requirements of Azimuth (see NOTE 6). The line is
secured by assets of ELXSI, including real estate, and the
outstanding stock of ELXSI. The agreement provides for
commitment fees of 0.3% on the unused portion of the line of
credit. 5,850,000 --
4. ELXSI Corporation
Unsecured senior subordinated note payable with interest at
15% payable quarterly in arrears, commencing November 15,
1989. -- 310,000
5. ELXSI Corporation
Unsecured senior subordinated notes payable with interest at
14.5% payable quarterly in arrears, commencing August 15,
1991. -- 877,000
6. Cues
Mortgage payable at 8.25% on the land and building owned by
Cues B.V. 122,000 141,000
Other $ 31,000 $ 18,000
18,974,000 13,055,000
Less current portion (268,000) (1,485,000)
----------- -----------
Long-Term Debt $18,706,000 $11,570,000
=========== ===========
The above bank debt agreements with BAI contain, among other provisions,
financial covenants related to the maintenance of ELXSI's minimum net worth,
restrictions on its capital expenditures and compliance with certain ratios
including liabilities to net worth, interest coverage and funded debt to
earnings before interest, taxes, depreciation and amortization.
F-18
Aggregate maturities of long-term debt for the five years ending December 31,
2000 and thereafter are as follows:
1997 $ 268,000
1998 18,601,000
1999 24,000
2000 10,000
2001 10,000
Thereafter 61,000
-------------
$ 18,974,000
=============
NOTE 8. Commitments and Contingencies
ELXSI conducts a substantial portion of its operations utilizing leased
facilities. ELXSI leases land and/or buildings at 46 of its 58 restaurants under
terms of lease agreements expiring on various dates (including extension
options) through 2032. The majority of the leases require that ELXSI pay taxes,
maintenance, insurance, and other occupancy expenses related to leased premises.
The rental payments for a majority of the restaurant locations are based on a
minimum annual rental plus a percentage of sales, as defined in the relevant
agreements. Generally, the leases provide for renewal options and in most cases,
management expects that in the normal course of business, lease agreements will
be renewed or replaced by other leases.
Cues has several non-cancelable operating leases, primarily for certain office
and transportation equipment, that expire over the next three years and
generally provide for purchases or renewal options.
The following is a schedule of future minimum lease commitments for the five
years ending December 31, 2001 and thereafter:
Capital Leases Operating Leases
-------------- ----------------
1997 $ 276,000 $ 2,722,000
1998 270,000 2,492,000
1999 175,000 2,441,000
2000 175,000 2,422,000
2001 175,000 2,301,000
Thereafter 2,543,000 16,957,000
----------- ------------
Total minimum lease payments 3,614,000 $ 29,335,000
============
Less - Amount representing interest (1,884,000)
-----------
Present value of net minimum capital lease payments 1,730,000
Less - current portion (142,000)
-----------
Noncurrent capital lease obligation $ 1,588,000
===========
Rent expense charged to operations amounted to $2,852,000, $2,235,000 and
$1,701,000 during 1996, 1995, and 1994, respectively.
At December 31, 1996 and 1995, ELXSI had outstanding letters of credit totalling
$0 and $500,000, respectively.
F-19
Cues has arrangements with truck dealers to deliver truck bodies which are used
in the manufacture of certain Cues products. Under these arrangements, Cues
reimburses the dealers' floor-plan financing costs for those vehicles held by
the dealers until delivery to Cues. The amount of this reimbursement for 1996,
1995 and 1994 was $61,000, $56,000 and $57,000, respectively. At December 31,
1996 and 1995, truck bodies held by the dealers under these arrangements were
valued at $643,000 and $688,000, respectively.
The Company is involved in various claims and lawsuits incidental to its
business. In the opinion of management, the resolution of these matters will not
have a material adverse effect on the Company's consolidated financial position
or results of operations.
NOTE 9. Thrift and Profit Sharing Plan
In 1986, Cues established a contributory trusteed thrift and profit sharing plan
covering all of its employees who have completed one year of eligible service.
The plan's enrollment dates are January 1, April 1, July 1, and October 1, of
each year. Participants have the option of making after-tax or deferred cash
contributions, not to exceed 6% of their annual compensation, which are
supplemented by employer matching contributions in the amount of 50% of the
participant's contribution. The participants may make additional voluntary
contributions to the plan which are not supplemented by employer contributions.
Participants partially vest in the employer's contributions after the second
year of service and are fully vested after the sixth year of service. Thrift and
profit sharing expense for 1996, 1995 and 1994 was $44,000, $48,000 and $40,000,
respectively.
During 1995, the Restaurant Division established a non-contributory trusteed
thrift and profit sharing plan covering all of its employees who are over the
age of 21 and have completed one year of eligible service.
NOTE 10. Common Stock
Activity in common stock shares for the years ended December 31, 1996, 1995 and
1994 was as follows:
1996 1995 1994
----------- ---------- ----------
Common Stock Issued:
Balance at beginning of year 4,792,353 5,032,333 5,368,870
Issuance of fractional shares 16 20 26
Options exercised -- -- 18,400
Shares repurchased and cancelled (131,500) (240,000) (354,963)
----------- ---------- ----------
Balance at end of year 4,660,869 4,792,353 5,032,333
=========== ========== ==========
NOTE 11. Common Stock Options and Warrants
Common Stock Options. At December 31, 1996 and 1995, the Company had a total of
769,587 and 644,587 common shares reserved for issuance under its stock option
plans, respectively. Options under the Company's plans are granted at prices
determined by the Board of Directors, which are generally not less than the fair
market value in the case of incentive stock options (or 75% of face market value
in the case of non-qualified options) of the Common Stock on the date of grant.
Options generally vest and become exercisable six months after the date of the
grant and expire ten years after the date of the grant.
F-20
During 1996, stockholders approved the 1996 Incentive Stock Option Plan (the
"1996 Plan"), under which up to 125,000 shares may be issued. Under the 1996
Plan presently outstanding options to purchase 103,450 shares were granted at an
exercise price of $6.50 per share. The options became exercisable on November
23, 1996.
During 1995, stockholders approved the 1995 Incentive Stock Option Plan (the
"1995 Plan"), under which up to 125,000 shares may be issued. Under the 1995
Plan presently outstanding options to purchase 103,300 shares were granted at an
exercise price of $5.75 per share. These options became exercisable on November
19, 1995.
During 1993, stockholders approved the 1993 Incentive Stock Option Plan (the
"1993 Plan"), under which up to 300,000 shares may be issued. Under the 1993
Plan presently outstanding options to purchase 243,810 shares were granted at
exercise prices between $5.00 and $6.50 per share. These options became
exercisable beginning on March 8, 1994.
Weighted-
Number Average
of Shares Option Price
--------- ------------
Outstanding at December 31, 1993 220,600 5.13
Granted during 1994 115,000 5.75
Exercised during 1994 (18,400) 3.13
Cancelled during 1994 --
Outstanding at December 31, 1994 317,200 5.47
Exercisable at December 31, 1994 282,050 5.41
Available for grant at December 31, 1994 202,987
Granted during 1995 124,800 5.69
Exercised during 1995 (600) 3.13
Canceled during 1995 (4,190) 5.56
Outstanding at December 31, 1995 437,210 5.53
Exercisable at December 31, 1995 374,478 5.46
Available for grant at December 31, 1995 207,377
Granted during 1996 130,450 6.21
Exercised during 1996 --
Canceled during 1996 (15,900) 5.40
Outstanding at December 31, 1996 551,760 5.70
Exercisable at December 31, 1996 480,305 5.68
Available for grant at December 31, 1996 217,827
F-21
The following table summarizes the stock options outstanding and exercisable at
December 31, 1996:
Outstanding Exercisable
-------------------------------------- ----------------------
Weighted-
Average Weighted- Weighted
Remaining Average Average
Range of Number of Contractual Exercise Number of Exercise
Exercise Prices Options Life Price Options Price
--------------- --------- ----------- -------- --------- --------
5.00 - 6.50 550,560 8 5.65 479,705 5.65
26.50 1,200 3 26.50 600 26.50
The Company has adopted the disclosure-only provisions of SFAS 123. During 1996,
1995 and 1994, no compensation expense has been recognized for the stock option
plans. Had compensation costs for the stock option plans been determined based
on the fair value at the date of grant for awards in 1996, 1995 and 1994
consistent with the provisions of SFAS 123, the Company's net income and
earnings per share would approximate the following pro forma amounts:
1996 1995 1994
------ ------ ------
Net income - as reported (000's) 7,383 4,546 4,734
Net income - pro forma (000's) 7,148 4,300 4,397
Earnings per share - as reported 1.51 0.89 0.79
Earnings per share - pro forma 1.46 0.84 0.73
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions: No dividend yield; expected volatility of 10%; risk free interest
rate 6.26%; and expected lives of 7 years. The weighted-average fair value of
options granted during fiscal 1996, 1995 and 1994 are as follows:
Weighted Weighted
Average Average
Number Exercise Fair
of Options Prices Values
------------------------------------
Fiscal 1996:
Exercise price = market price at date of grant 130,450 6.21 2.24
Fiscal 1995:
Exercise price = market price at date of grant 104,800 5.75 2.07
Exercise price > market price at date of grant 20,000 5.38 1.81
-------
124,800
Fiscal 1994:
Exercise price = market price at date of grant 115,000 5.75 2.06
F-22
Warrants. At December 31, 1996 and 1995, the Company had a total of 269,262 and
511,124 common shares reserved for issuance pursuant to warrants as follows:
In connection with the acquisition of Cues, the Company issued a Series C
warrant to purchase 68,762 shares of the Company's Common Stock. This warrant
remained unexercised at December 31, 1996, and originally had an exercise price
and expiration date of $4.36 per share and January 31, 1997, respectively.
During 1997, this warrant's expiration date was extended until January 31, 1999
and the exercise price was increased to $5.23 per share.
In connection with the Stock and Note Purchase Agreement (see NOTE 6), the
Company issued warrants to acquire up to an aggregate of 1,204,000 shares of the
Company's Common Stock. On December 8, 1994, the Company repurchased 761,638 of
these Series A Warrants from Airlie for $1,635,000, or $2.125 per warrant. On
December 30, 1996, the Company repurchased all of the Series B warrants for
convertible preferred stock (convertible into 241,862 shares of Common Stock)
from BACC for $478,000, or $1.975 per underlying common share. The remaining
200,500 Series A Warrants remain unexercised at December 31, 1996, and
originally had an exercise price and expiration date of $3.125 and September 25,
1996, respectively. During 1996, these warrant's expiration date were extended
until September 30, 1998 and the exercise price was increased to $3.75 per
share.
Phantom Stock Option Plan. The phantom stock option plan was implemented in 1992
as a long-term incentive plan for four key executives of Bickford's Restaurants
(the "Group"). At the inception of the plan, the Group paid an initial
investment totalling approximately $116,000. Each Group member is entitled to
receive, upon exercise, a cash payment equal to his individual vested percentage
of the appraised value of Bickford's Restaurants, as defined, less the balance
of his exercise price payable upon exercise. Full vesting occurred on July 1,
1996, at which time the Group, as a whole, was entitled to 13.9% of the
appraised value of Bickford's Restaurants, as defined. Each Group member's
phantom stock options may be exercised at the earliest of July 1, 2001, the
termination of his employment, his death or the sale of the Restaurants.
The assumptions used in calculating the annual expense are set forth in the plan
agreement and include the use of a multiple of the Bickford's Restaurants
operating income, less certain Bickford's-related liabilities, a non-liquidity
discount, estimated taxes related to a gain on divestiture of the Restaurants,
sale transaction costs and the exercise price. During 1996, 1995 and 1994, the
Company recorded compensation expense related to the phantom stock option plan
of $550,000, $600,000 and $300,000, respectively. As of December 31, 1996 and
1995, $1,946,000 and $1,396,000, respectively is recorded in other non-current
liabilities, which represents 13.9% of the estimated appraised value of
Bickford's Restaurants , as defined, on those dates.
F-23
NOTE 12. Segment Reporting
The Company operates in two segments, restaurant management and equipment
manufacturing. Summarized financial information by business segment for the
years ended December 31, 1996, 1995 and 1994 is as follows:
1996 1995 1994
------------- ------------- -------------
Net Sales:
Restaurants $ 61,283,000 $ 54,270,000 $ 43,391,000
Equipment 21,460,000 20,404,000 19,032,000
------------- ------------- -------------
$ 82,743,000 $ 74,674,000 $ 62,423,000
============= ============= =============
Operating Income:
Restaurants $ 6,019,000 $ 7,088,000 $ 6,404,000
Equipment 1,334,000 988,000 1,346,000
Corporate (1,350,000) (1,439,000) (1,191,000)
------------- ------------- -------------
$ 6,003,000 $ 6,637,000 $ 6,559,000
============= ============= =============
Total Assets:
Restaurants $ 29,780,000 $ 30,008,000 $ 25,989,000
Equipment 18,328,000 16,321,000 13,182,000
Corporate 11,370,000 1,370,000 1,345,000
------------- ------------- -------------
$ 59,478,000 $ 47,699,000 $ 40,516,000
============= ============= =============
Depreciation and Amortization:
Restaurants $ 2,318,000 $ 1,833,000 $ 1,460,000
Equipment 457,000 373,000 334,000
------------- ------------- -------------
$ 2,775,000 $ 2,206,000 $ 1,794,000
============= ============= =============
Capital Expenditures:
Restaurants $ 2,891,000 $ 1,967,000 $ 2,015,000
Equipment 217,000 390,000 348,000
------------- ------------- -------------
$ 3,108,000 $ 2,357,000 $ 2,363,000
============= ============= =============
Capital expenditures exclude amounts in connection with acquisition and
divestitures.
There were no inter-segment sales or transfers during 1996, 1995, and 1994.
Operating income by business segment excludes interest income, interest expense,
and unallocated corporate expenses. Corporate assets consist principally of the
related party notes and interest receivable, the deferred tax asset and the
closing fee receivable due from the Azimuth Subsidiaries.
Foreign assets, revenues, and export sales each represents less than 10% of the
Company's totals. No material amount of the Company's sales are dependent upon a
single customer.
F-24
NOTE 13. Quarterly Financial Data - (Unaudited) The following summarizes
quarterly financial data for 1996 and 1995 (in thousands, except per share
data):
1996
-------------------------------------------
Mar. 31, June 30, Sep. 30, Dec. 31,
-------- -------- -------- --------
Net sales $ 19,820 $ 21,665 $ 21,242 $ 20,016
Gross profit 3,356 4,202 4,249 4,333
Income before income taxes 519 1,264 1,482 1,786
Net income $ 430 $ 1,124 $ 1,315 $ 4,514
Earnings per common share $ .09 $ .21 $ .27 $ .94
1995
-------------------------------------------
Mar. 31, June 30, Sep. 30, Dec. 31,
-------- -------- -------- --------
Net sales $ 15,614 $ 16,914 $ 22,048 $ 20,098
Gross profit 3,410 3,903 4,504 4,510
Income before income taxes 833 1,222 1,591 1,414
Net income $ 745 $ 1,084 $ 1,432 $ 1,285
Earnings per common share $ .15 $ .21 $ .28 $ .25
In the fourth quarter of 1996, the Company recorded a $2,881,000 credit to
benefit for income taxes as a result of the release of a portion of the
valuation allowance as discussed in NOTE 5.
F-25
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
ELXSI CORPORATION AND SUBSIDIARIES
(Dollars in Thousands)
Additions
--------------------------------
Balance at Charged Charged to Balance
Beginning Costs and Other Deductions at End
of Period Expenses Accounts-describe Describe of Period
------------- ------------ ----------------- ----------- -----------
Year ended December 31, 1996
Account deducted from assets:
Reserve for doubtful accounts
receivable $ 58 $ 28 $ 3 (C) (35) (A) $ 54
====== ====== ====== ====== ======
Inventory reserve $ 150 $ 400 $ -- -- (B) 550
====== ====== ====== ====== ======
Year ended December 31, 1995
Account deducted from assets:
Reserve for doubtful accounts
receivable $ 35 $ 23 $ 19 (C) (19) (A) $ 58
====== ====== ====== ====== ======
Inventory reserve $ 100 $ 54 $ -- (4) (B) 150
====== ====== ====== ====== ======
Year ended December 31, 1994
Account deducted from assets:
Reserve for doubtful accounts
receivable $ 77 $ 3 $ -- (45) (A) $ 35
====== ====== ====== ====== ======
Inventory reserve $ 262 $ 53 $ -- (215) (B) $ 100
====== ====== ====== ====== ======
(A) Uncollectible accounts written off during 1996, 1995 and 1994.
(B) Obsolete inventory written off during 1996, 1995 and 1994.
(C) Bad debt recoveries.
S-1
ELXSI Corporation
Exhibits Index
1996 - Form 10-K
Exhibit
Number Description Page No.
- ------ ----------- --------
2.1 Agreement and Plan of Merger by and among ELXSI Corporation,
ELXSI, Cadmus Corporation and Holdingcues, Inc. dated as of
October 16, 1992, including form of Series C Warrant.
(Incorporated herein by reference to Exhibit 2.7 of the
Company's Current Report on Form 8-K as filed November 13,
1992 (File No 0-11877)).
2.2 Family Restaurant Sale and Purchase Agreement, between
Marriott Family Restaurants, Inc. ("Marriott") and the
Company dated February 28, 1991. (Incorporated herein by
reference to Exhibit 2.1 of the Company's Current Report on
Form 8-K, dated July 16, 1991 (File No. 0-11877)).
2.3 Side Letter to the Family Restaurant Sale and Purchase
Agreement between Marriott and the Company dated February
28, 1991. (Incorporated herein by reference to Exhibit 2.2
of the Company's Current Report on Form 8-K, dated July 16,
1991 (File No. 0-11877)).
2.4 Assignment and Guaranty of Family Restaurants Sale and
Purchase Agreement and Side Letter, between the Company,
Marriott and ELXSI dated June 29, 1991. (Incorporated herein
by reference to Exhibit 2.3 of the Company's Current Report
on Form 8-K, dated July 16, 1991 (File No. 0-11877)).
2.5 Closing Side Letter Agreement Regarding Family Restaurants
Sale and Purchase Agreement between ELXSI and Marriott dated
July 1, 1991. (Incorporated herein by reference to Exhibit
2.4 of the Company's Current Report on Form 8-K, dated July
16, 1991 (File No. 0-11877)).
2.6 Real Estate Closing Side Letter Agreement Regarding Family
Restaurants Sale and Purchase Agreement between ELXSI and
Marriott dated July 1, 1991. (Incorporated herein by
reference to Exhibit 2.5 of the Company's Current Report on
Form 8-K, dated July 16, 1991 (File No. 0-11877)).
2.7 Agreement Concerning Massachusetts and Connecticut Liquor
Licenses between ELXSI and Marriott dated July 1, 1991.
(Incorporated herein by reference to Exhibit 2.6 of the
Company's Current Report on Form 8-K, dated July 16, 1991
(File No. 0-11877)).
3.1 Restated Certificate of Incorporation of the Company, as
amended. (Incorporated herein by reference to Exhibit 3.1 of
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1989 (file No. 0-11877)).
3.2 Certificate of Amendment of Restated Certificate of
Incorporation of the Company dated May 27, 1992.
(Incorporated herein by reference to Exhibit 3.2 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 (file No. 0-11877)).
3.3 Bylaws of the Company. (Incorporated herein by reference to
Exhibit 3.1 of the Company's Registration Statement on Form
S-4, as amended. (file No. 0-11877)).
4.1 Series A Warrant No. A-7 to purchase 50,000 shares of Common
Stock issued to Eliot Kirkland L.L.C. ("EKLLC").
4.2 Form of Allonge and Amendment to Series A Warrants of ELXSI
Corporation, with respect to the foregoing Warrant.
4.3 Series A Warrant No. A-6 to purchase 150,500 shares of
Common Stock issued to the Alexander M. Milley Irrevocable
Trust I U/A dated May 9, 1994. (Incorporated herein by
reference to Exhibit 4.2 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994 (file
No. 0-11877)).
4.4 Form of Allonge and Amendment to Series A Warrants of ELXSI
Corporation, with respect to the foregoing Warrant.
4.5 Series B Warrant No. B-1 to purchase 604,656 shares of
Series A Non-Voting Convertible Preferred Stock issued to
Continental Illinois Equity Corporation ("CIEC") (now named
BankAmerica Capital Corporation ("BACC")). (Incorporated
herein by reference to Exhibit 4.6 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1989 (file No. 0-11877)).
4.6 Series C Warrant No. C-3 to purchase 68,762 shares of Common
Stock issued to EKLLC.
4.7 Form of Allonge and Amendment to Series C Warrants of ELXSI
Corporation, with respect to the foregoing Warrant.
4.8 Amended and Restated Registration Rights Agreement dated as
of January 23, 1990 among the Company, Milley & Company
("M&C") and CIEC. (Incorporated herein by reference to
Exhibit 4.7 of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1989 (file No. 0-11877)).
4.9 Exercise of Option and Assignment of Registration Rights
executed by ELX Limited partnership ("ELX") and The Airlie
Group, L.P. ("Airlie") dated November 30, 1994.
(Incorporated herein by reference to Exhibit 4.6 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 (file No. 0-11877)).
4.10 15% Senior Subordinated Note issued by the Company to CIEC
in the amount of $401,765.00. (Incorporated herein by
reference to Exhibit 10.18 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1989 (file
No. 0-11877)).
4.11 14.5% Senior Subordinated Note issued by the Company to CIEC
in the amount of $502,206.25 dated June 27, 1991.
(Incorporated herein by reference to Exhibit 4.8 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 (file No. 0-11877)).
4.12 Amended and Restated Loan and Security Agreement, dated as
of December 30, 1996, between ELXSI and Bank of America
Illinois ("BAI").
4.13 Warrant Purchase and Senior Subordinated Note termination
Agreement, dated as of December 30,1996, between BACC and
the Company.
4.14 14.5% Senior Subordinated Note issued by the Company to Pan
Fixed Income Fund, Ltd., dated as of November 16, 1993 in
the amount of $250,000. (Incorporated herein by reference to
Exhibit 4.12 of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994 (file No. 0-11877)).
4.15 14.5% Senior Subordinated Note issued by the Company to Rona
Jaffe, dated as of November 16, 1993 in the amount of
$100,000. (Incorporated herein by reference to Exhibit 4.13
of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994 (file No. 0-11877)).
4.16 14.5% Senior Subordinated Note issued by the Company to Anne
Strassler A.C.S.W. P.C., dated as of November 16, 1993 in
the amount of $25,000. (Incorporated herein by reference to
Exhibit 4.14 of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994 (file No. 0-11877)).
10.1 The Company's 1987 Incentive Stock Option Plan as amended.
(Incorporated by reference to Exhibit 10.1 of the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1987 (file No. 0-11877)).
10.2 The Company's 1987 Supplemental Stock Option Plan as
amended. (Incorporated by reference to Exhibit 10.2 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1987 (file No. 0-11877)).
10.3 The Company's 1993 Incentive Stock Option Plan.
(Incorporated herein by reference to Exhibit 10.3 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 (file No. 0-11877)).
10.4 The Company's 1995 Incentive Stock Option Plan (Incorporated
herein by reference to Exhibit 4.1 to the Company's Form S-8
Registration Statement filed November 14, 1995 (Registration
No. 033-64205)).
10.5 The Company's 1996 Incentive Stock Option Plan (Incorporated
herein by reference to Exhibit 4.1 to the Company's Form S-8
Registration Statement filed December 2, 1996 (Registration
No. 333-17131)).
10.6 The ELXSI 1991 Phantom Stock Option Plan for the management
of the Bickford's Division. (Incorporated herein by
reference to Exhibit 10.4 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994 (file
No. 0-11877)).
10.7 Amendment No. 1 to the ELXSI 1991 Phantom Stock Option Plan
for the management of the Bickford's Division. (Incorporated
herein by reference to Exhibit 10.5 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1994 (file No. 0-11877)).
10.8 Non-Qualified Stock Option Agreement issued to Robert C.
Shaw for the purchase of 12,500 shares of Common Stock,
dated October 30, 1992. (Incorporated herein by reference to
Exhibit 10.7 of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994 (file No. 0-11877)).
10.9 Non-Qualified Stock Option Agreement issued to John C.
Savage for the purchase of 10,000 shares of Common Stock,
dated October 30, 1992. (Incorporated herein by reference to
Exhibit 10.8 of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994 (file No. 0-11877)).
10.10 Non-Qualified Stock Option Agreement issued to Farrokh K.
Kavarana for the purchase of 10,000 shares of Common Stock,
dated October 30, 1992. (Incorporated herein by reference to
Exhibit 10.9 of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994 (file No. 0-11877)).
10.11 Non-Qualified Stock Option Agreement issued to Kevin P.
Lynch for the purchase of 20,000 shares of Common Stock,
dated October 30, 1992. (Incorporated herein by reference to
Exhibit 10.10 of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994 (file No.
0-11877)).
10.12 Non-Qualified Stock Option Agreement issued to Alexander M.
Milley for the purchase of 30,000 shares of Common Stock,
dated October 30, 1992. (Incorporated herein by reference to
Exhibit 10.11 of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994 (file No.
0-11877)).
10.13 Non-Qualified Stock Option Agreement issued to Thomas R.
Druggish for the purchase of 12,500 shares of Common Stock,
dated October 30, 1992. (Incorporated herein by reference to
Exhibit 10.12 of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994 (file No.
0-11877)).
10.14 Stock and Note Purchase Agreement dated as of August 31,
1989 by and among the Company, Airlie and M&C. (Incorporated
herein by reference to Exhibit 2.1 of the Company's Current
Report on Form 8-K as filed October 3, 1989 (File No
0-11877)).
10.15 Stock and Note Purchase Agreement dated as of January 23,
1990 among Airlie, CIEC and M&C. (Incorporated herein by
reference to Exhibit 10.14 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994 (file
No. 0-11877)).
10.16 Management Agreement ("Management Agreement") between
Winchester National, Inc. (d/b/a as M&C) and the Company
dated September 25, 1989. (Incorporated herein by reference
to Exhibit 10.21 of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991 (file No.
0-11877)).
10.17 Assignment of Management Agreement dated June 28, 1991 among
the Company, Winchester National, Inc., ELXSI and MMI.
(Incorporated herein by reference to Exhibit 10.16 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 (file No. 0-11877)).
10.18 Management Agreement Extension dated September 25, 1992
between ELXSI and MMI. (Incorporated herein by reference to
Exhibit 10.17 of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994 (file No.
0-11877)).
10.19 Assignment to Cadmus Corporation ("Cadmus"), dated January
1, 1994 of MMI's rights under the extended Management
Agreement dated September 25, 1992, as amended between ELXSI
and MMI. (Incorporated herein by reference to Exhibit 10.18
of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994 (file No. 0-11877)).
10.20 Promissory Note of ELX payable to the Company dated December
8, 1994 in the amount of $1,155,625.00 due December 8, 1997.
(Incorporated herein by reference to Exhibit 10.6 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 (file No. 0-11877)).
10.21 Form of Stock Purchase and Option Exercise Agreement, dated
as of December 30, 1996, between BACC and ELX (Incorporated
herein by reference to Exhibit D to the Amendment No. 10 to
the Schedule 13D of Alexander M. Milley, MMI, ELX, Cadmus
and EKLLC, dated January 7, 1997, filed in respect of the
Company's Common Stock).
10.22 Form of Promissory Note of ELX payable to the Company, dated
December 30, 1996, in the amount of $909,150 due on December
30, 1999 (Incorporated herein by reference to Exhibit E to
the Amendment No. 10 to the Schedule 13D of Alexander M.
Milley, MMI, ELX, Cadmus and EKLLC, dated January 7, 1997,
filed in respect of the Company's Common Stock).
10.23 Form of Recapitalization Agreement, dated as of December 30,
1996, among Azimuth Corporation ("Azimuth"), Delaware
Electro Industries, Inc. ("DEI"), Contempo Design, Inc.
("CDI"), Contempo Design West, Inc. ("CDW"), ELXSI and BAI
(Incorporated herein by reference to Exhibit F to the
Amendment No. 10 to the Schedule 13D of Alexander M. Milley,
MMI, ELX, Cadmus and EKLLC, dated January 7, 1997, filed in
respect of the Company's Common Stock).
10.24 Second Amended and Restated Loan and Security Agreement,
dated as of October 9, 1995, between Azimuth and BAI.
10.25 Loan and Security Agreement, dated as of October 9, 1995,
between DEI and BAI.
10.26 Loan and Security Agreement, dated as of October 9, 1995,
between CDI and BAI.
10.27 Loan and Security Agreement, dated as of October 9, 1995,
between CDW and BAI.
10.28 First Omnibus Amendment, dated as of August 9, 1996, among
Azimuth, DEI, CDI, CDW and BAI.
10.29 Second Omnibus Amendment, dated as of September 23, 1996,
among Azimuth, DEI, CDI, CDW and BAI.
10.30 Third Omnibus Amendment, dated as of November 27, 1996,
among Azimuth, DEI, CDI, CDW and BAI.
10.31 Second Amended and Restated Guaranty, dated as of October 9,
1995, made by DEI, CDI and CDW in favor of BAI.
10.32 Second Amended and Restated Pledge Agreement, dated as of
October 9, 1995, among Azimuth, DEI, CDI, CDW and BAI.
21.1 Subsidiaries of the Company. (Incorporated by reference to
Exhibit 22.1 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1990 (file No. 0-11877)).
23.1 Consent of Price Waterhouse LLP
27 Financial Data Schedule